Chapter 3 Flashcards
Preferences, Utility, budget constraint, constrained choices
What is a bundle?
A bundle gives quantities of two goods
What 3 assumptions do we make about preferences?
- Completeness
- Transitivity
- Monotonicity
What is completeness with respect to preferences?
Any bundle can be compared, consumers cannot say “I don’t know”
What is transitivity with respect to preferences?
If a is greater than b, and b is greater than c, then a is greater than c
What is monotonicity with respect to preferences?
If a bundle contains more of both goods, it is better
What is an indifference cards?
Indifference curves connect bundles that the consumer is indifferent to
What are the five properties of indifference curves?
- ICs to the northeast contain more preferred bundles
- Exactly one IC through every bundle
- ICs cannot cross
- ICs slope downwards
- cannot be thick
What does Utility measure?
an alternative way to represent a consumer’s preferences over bundles
what are ordinal preferences?
Preferences look at which is preferred but not by how much
What is the decreasing rate of substitution?
As you move down an indifference curve, typically the rate of substitution decreases
What is marginal rate of substitution?
The slope of the tangent line to an indifference curve
What is marginal utility?
the additional utility from a tiny bit more of a good i, holding the amount of good j fixed
What is MRS is used for in the real world?
the rate at which you are willing to trade goods
What are the four classes of utility functions?
- Perfect substitutes
- Perfect complements
- Imperfect substitutes
- Quasilinear
Perfect substitutes indifference curve
the slope is i/j, meaning you sub i/j units of good 2 as a perfect substitute for a 1 unit of good 1
Perfect complements indifference curve
you need goods in 1:1 ratio, having only more of 1 is useful
Where do imperfect substitutes lie on a graph?
in between the extremes of perfect substitutes and perfect complements
What are budget constraints?
how much of good one and two you can buy with the amount of income you have
