Chapter 3: Rational Consumer Choice Flashcards
4 properties of preference orderings
- Completeness
- More-is-better
- Transitivity
- Convexity
Preference ordering
A ranking of all possible consumption bundles in order of preference.
Completeness
A precise ordering is complete if it enables the consumer to rank all possible combinations of goods and services
More-is-better property
Means that, other things equal, more of a good is preferred to less.
Transitive property
Transitivity means that, for any three bundles A, B and C, if he prefers A to B and B to C, then he always prefers A to C,
Convexity
Mixtures of goods are preferable to extremes.
Indifference curve
A set of bundles along which the consumer is indifferent
Indifference map
A representative sample of the set of a consumers indifference curves used as a graphical summary of her preference ordering.
Ordinal utility
Assumes that customers will always be able to say whether he prefers A to B, but that he may not be able to state how much better A is to B
Cardinal utility approach
Assumes that consumers are able to give a specific value to their level of satisfaction
Properties of indifference curves and indifference maps
- Indifference curves at ubiquitous. Any bundle has indifference curves paying thorough it.
- Downward sloping
- Cannot cross
- Become less steep as one moves downwards
Marginal Rate of Substitution
At any point on an indifference curve, the rate at which the consumer is willing to exchange the good measured along the vertical axis for the good measured along the horizontal axis; is equal to the absolute value of the slope of the indifference curve.
Bundle
A particular combination of 2+ goods.
Budget line
The set of all bundles that exactly exhaust the consumer’s income at given prices.
Affordable Set
Bundles on or below the budget line.
Bundles for which the required expenditure at given prices is less than or equal to the income available.
