Consumer Preferences And Utility Flashcards
4 assumptions of consumer preferences
Completeness,
Transitivity
Diminishing marginal utility
Non satiation
Consumption bundl3
Any sets of goods or services a consumer considers purchasing
Marginal utility
The extra utilityackndumer receives f4om on unit inc4eas4 in consumption
Indifference curve
The combination of all 5h3 e8tt343n5 f9beum0ti9n bundles that provide a consumer with the same utility
Name the four charscter8stics of indifference curves
Drawable as the first assumption states that all bundles have completeness and rankability.
We can figure out which have higher utility and why they slope downwards.
Indifferenc3 curves never cross
convex to origin
Difference between cardinal and ordinary rankings
Utility allows us to rank bundles, it allows us to determine an ordinal ranking [ best to worst ] but does not allow us to determine a cardinal ranking [preference of one bundle over another]
Why can’t we establish a cardinal ranking when describing utility
Because it is an arbitrary measurement with no real units therefore we cannot make interpersonal comparisons of utility
Cobb douglas
X^1/2Y^1/2
Income expansion path
Curve that shows the relationship between consumption bundle preferences across changes in income level of the consumer
Drawbacks of income expansion path
Only 2 axis so we don’t know corresponding income
Engel curve
Shows the change in quantity consumed of a single product across change in income
Engel curve of normal good
Upward sloping
Engel curve of inferior good
Inverse C shape
Perfect substitutes
DOWNWARD SLOPING CYRVE
Perfect complements
L SHAPED CURVE
