Consumer Choice Flashcards
What are preferences
Preferences are what consumers prefer - their tastes
What are the three properties of preferences
Completeness, Transitivity, and More is better
Describe the completeness assumption
means that given a choice between bundles, a consumer can rank them even if it is indifference. so between A and B - the consumer can A~>B or B~>A or A~B. but not having an opinion is not an option
Describe the transitivity assumption
Preferences have to be logical. If you say A>B and B>C then A>C. You can’t say something crazy like C>A
Describe the more is better assumption
Given the choice, consumers will always choose to have more as long as more is disposable and all other factors hold true
What does the Indifference Curve on a preference map tell us
The set of all bundles that a consumers views as being equally desired
What is an Indifference map
it’s a map of a set of indifference curves that summarize a consumer’s tastes or preferences
What does the marginal rate of substitution tell uss
It tells us amount of one good a consumer is willing to give in exchange for more of another good.
How do you find the marginal rate of substitution
MRS = rate of substitution of the good you’re giving up / a marginal change in the good you’re gaining. It’s the slope from one point to the other
Describe Diminishing Marginal Rate of Substitution
The willingness to trade fewer of one item in exchange for another. It approaches zero as we move down and to the right along the indifference curve making the indifference curve flatter and less sloped
Describe Utility
Utility is a set of numerical values that reflect the relative rankings of various bundles of good. I prefer bundle x to y” is the equivalent of “consuming bundle x gives me more utility than consuming y”
What is the utility function and what does it describe
U=square root of x*y
it describes the relationship between utility measures and every possible bundle of goods
Describe what Marginal Utility is
The extra utility that a consumer gets from consuming the last unit of a good. MUz=delta U / delta Z
What is a budget line
Also know as the budget constraint. It is the bundles of goods that can be bought if the entire budget is spent
What is the Marginal Rate of Substitution function
MRS = -MUx / MUy
