Lecture 1: Introction and Preferences Flashcards
What is completeness?
Preferences can be ranked.
For every set of bundles, the consumer prefers one bundle to the other, or is indifferent.
What is transitivity?
Preferences don’t cycle; the consumer has sequentially consistent preferences over bundles.
If x1>x2 and x2>x3, then x1>x3
What is monotonicity?
Also known as the axiom of non-satiation; more is better than less.
What is convexity?
Averages are better than extremes.
What makes preferences well-behaved?
They follow the axioms of completeness, monotonicity, transitivity and convexity.
Why does it mean when consumers choose their most preferred bundle?
They are maximising their utility
What do the four axioms represent?
Preferences with a utility function.
What is an indifference curve?
A curve where consumers are indifferent between all points along the curve
Why are indifference curves ubiquitous in commodity space?
Divisibility and completeness
What properties do indifference curves have if preferences are complete, transitive, and monotonic?
Downwards sloping
Do not intersect
What does convexity imply?
Diminishing marginal rate of substitution
