Chapter 3 Flashcards
bundle
particular combination of two or more goods
budget constraint
set of all bundles that exactly exhaust the consumer’s income at given prices
affordable set
bundles on or below the budget constraint;
preference ordering
ranking of all possible consumption bundles in order of preference.
properties of preference ordering
completeness
more-is-better
transitivity
convexity
completeness
if it enables the consumer to rank all possible combinations of goods and services
more-is-better
other things equal, more of a good is preferred to less
transitivity
for any three bundles (A,B, and C), the buyer prefers A to B, B to C, then he always prefers A to C
convexity
mixtures of goods are preferable to extremes
indifference curve
set of bundles among which the consumer is indifferent
indifference map
graphical summary of indifference curves used as preference ordering
Four properties of indifference curves
Found everywhere
Downward sloping
Cannot cross
Become less steep as you move down and rightward
Marginal Rate of Substitution
rate at which the consumer is willing to exchange the good measured along the vertical axis for the good measured along the horizontal axis; equal to the absolute value of the slope of the indifference curve
best affordable bundle
the most preferred bundle of those that are affordable
corner solution
choice between two goods in which the consumer does not consume one of the goods
Indifference curves with perfect substitutes are
straight lines
Finding all of the consumption bundles that deliver a given ____ for a utility function enables one to derive an indifference curve.
value
The affordable set of bundles make up what is known as the budget
triangle
The more-is-better property is violated if indifference curves are
upward sloping.
With choices involving only two goods, the budget constraint is a line. With three goods, the budget constraint becomes a
plane
“The collection of goods that an individual consumes over a given time period (hour, day, month, etc.) is called a
consumption bundle. “
If a consumer’s MRS is everywhere greater, or less, than the slope of his budget constraint, satisfaction
is maximized at a corner
If an individual’s preferences are stable and his budget constraint is the same in two different situations, the rational choice model says he should make ____ choices.
identical
