Indifference analysis

Question 1

Axioms

Answer 1

1. Completeness - consumer is able to rank all possible combinations of goods and services.
2. More is Better - more of a good is preferred to less
3. Transivity - for any three bundles
4. Convexity - mixture of bundles are preferable

Question 2

Relationship between axioms and indifference curve?

Answer 2

if all are satisfied then can be represented on an indifference curve, at each point on the curve the consumer has no preference for one bundle over another.

Question 3

Properties?

Answer 3

downward sloping, cannot cross, become less steep as we move outward, are UBIQUITOUS

Question 4

Budget line

Answer 4

line representing all affordable bundles of goods and services

Question 5

Income Consumption Curve

Answer 5

the set of optimal bundles traced on an indifference map as income varies

Question 6

Engel curve

Answer 6

relationship between the quantity of a good consumed and income

Question 7

Normal good

Answer 7

good that when income rises demand rises

Question 8

Inferior good

Answer 8

when income rises, demand falls

Question 9

Giffen good

Answer 9

When demand rises when price rises

Question 10

Pcc and demand curve?

Answer 10

PCC connects all tangents of the indifference curve and budget lines , when price and income are fixed. Demand curve shows the demand for a commodity that varies with price.

Question 11

income effect

Answer 11

the income effect is the effect of a price change due to a change in price.

Question 12

substitution effect

Answer 12

the change in price from an associated change in the relative attractiveness of other goods.

Question 13

Labour supply and the wage rate.

Answer 13

Backward bending curve, that labour supply are positively related - as the wage rate increases the labour supply follows. However the backward bending curve illustrates that past a certain point the increase in wage causes a fall in labour - this is because consumers exchange the income obtained for leisure time.