EC109 Test 1

Question 1

3 properties of preference

Answer 1

Completeness
Transitivity
Continuous

Question 2

Completeness

Answer 2

The consumer can always compare/rank bundles. Either X > Y, or Y > X, or X ~ Y

Question 3

Transitivity

Answer 3

If X≽Y and Y≽Z then X≽Z

Question 4

Continuous

Answer 4

If X is preferred to Y, and there is a third bundle Z which lies within a small radius of Y, then X will be preferred to Z.

Tiny changes in bundles will not change preference ordering.

Question 5

Well-behaved preferences

Answer 5

Monotonicity (non-satiation)
Convexity

Question 6

Monotonicity (non-satiation)

Answer 6

Goods not bads - more is better.
If bundle Y has at least as much of both goods, and more of one, then bundle y > bundle x

Question 7

Convexity

Answer 7

Averages are better than extremes
An average of two bundles on the same indifference curve will be (at least weakly) preferred, for any 0<t<1

z = (tx1 + (1-t)y1, tx2 + (1-t)y2) ≽ (x1,x2)

Question 8

Normal goods

Answer 8

As price falls, consumption rises
As incomne rises, consumption rises

Question 9

Inferior goods

Answer 9

As price falls, consumption rises
As income rises, consumption falls

Question 10

Giffen goods

Answer 10

As price falls, consumption falls
As income rises, consumption falls

Question 11

Example of giffen goods

Answer 11

Bread, cigarettes, rice

Question 12

Homothetic preferences

Answer 12

The MRS is the same at different levels of income.

MRS depends on the ratio of the two goods.

The indifference curves have the same MRS at all points on a ray from the origin, as the ratio of the two goods doesn’t change as income rises.

Question 13

Quasilinear preferences

Answer 13

MRS depends only on the amount of one good being consumed.

They have the same MRS on vertical rays - we have utility functions that are linear in one good but non-linear in another.

Goods that we tend to spend very little of our income on mean that when income rises, we are more likely to spend more on other goods.