Indifference Analysis Flashcards
Learn indifference cards from year 1
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What is the budget constraint equation?
y=(M/Py)-(Px/Py)x
For VAT, if the price of a good equals p, then what is the cost? And for a quantity tax?
(1+τ)p
=p+t
Equation for subsidies, one for price one for quantity?
σ=subsidy value (%)
(1-σ)p
Quantity: p-s
What is a lump sum tax? How does it affect indifference analysis?
Set tax regardless of consumer’s behaviour tf shift budget line inwards (decrease in B)
What is rationing and how does it affect indifference analysis?
When one or both goods have a maximum level of consumption tf is fixed (see diagram)
See notes
On combination of taxes/subs and rationing
What do the following preference notations mean:
1) A>B
2) A~B
3) A>~B?
1) A is strictly preferred to B
2) Consumer is indifferent between A and B
3) A is weakly preferred to B (ether strictly preferred OR equal)
What is the 4th basic assumption and what does it mean?
Reflexivity = any bundle is at least as good as itself (A>~A)
See
Page 3 lecture 2 handout
What will a diagram with goods x and y look like when x is bad and y is good?
Upward sloping IC curves (see diagram)
What will a diagram for a neutral good (y) look like and why?
Vertical, parallel indifference curves since increasing consumption gives zero utility (MRS is infinite)
What is the MRS for perfect comportments and perfect subs and strictly covex ICs?
Complements, MRS=constant
Substitutes = 0 or infinite
Strictly convex: |MRS| is diminishing
What is the satiation point for a consumer?
The overall best bundle tf ‘bliss point’ - the further a consumer is from it the less happy they are (see diagram)
See notes
Page 7 L2 handout 1 (IC behaviour)
