Lecture 1: Introction and Preferences Flashcards

1
Q

What is completeness?

A

Preferences can be ranked.

For every set of bundles, the consumer prefers one bundle to the other, or is indifferent.

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2
Q

What is transitivity?

A

Preferences don’t cycle; the consumer has sequentially consistent preferences over bundles.

If x1>x2 and x2>x3, then x1>x3

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3
Q

What is monotonicity?

A

Also known as the axiom of non-satiation; more is better than less.

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4
Q

What is convexity?

A

Averages are better than extremes.

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5
Q

What makes preferences well-behaved?

A

They follow the axioms of completeness, monotonicity, transitivity and convexity.

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6
Q

Why does it mean when consumers choose their most preferred bundle?

A

They are maximising their utility

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7
Q

What do the four axioms represent?

A

Preferences with a utility function.

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8
Q

What is an indifference curve?

A

A curve where consumers are indifferent between all points along the curve

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9
Q

Why are indifference curves ubiquitous in commodity space?

A

Divisibility and completeness

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10
Q

What properties do indifference curves have if preferences are complete, transitive, and monotonic?

A

Downwards sloping

Do not intersect

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11
Q

What does convexity imply?

A

Diminishing marginal rate of substitution

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