Consumer Behaviour

Question 1

What is the notation used to explain consumer pereferences?

Answer 1

A > B = A is strictly preferred to B

A < B = B is strictly preferred to A

A ~ B = Consumer is indifferent between A and B

Question 2

What are the assumptions that underlie consumer preference ordering?

Answer 2

• More is better (non-satiation): Our consumer always wants more of a good, regardless of how much he already has. All bundles on a higher indifference curve are preferred (show diagramatically).
• Completeness: A consumer is always capable of expressing preference (or indifference) between bundles. S/he cannot say “I dont know”!
• Diminishing MRS: The more a consumer has of one good, the more s/he is willing to give up in order to gain an extra unit of another good. Basically, this is saying the consumer likes variety!
• Transitivity: Simply, if A is preffered to B, and B is preferred to C, A MUST be preferred to C.

Question 3

What is the slope of the budget line?

Answer 3

Market rate of substitution, where -P_x / P_Y.