Lecture 3 | Assumptions about indifference curves

Question 1

What are the four assumptions about indifference curves and what do they mean?

Answer 1

1. Completeness: Consumer must prefer one basket over the other or be indifferent between them, this may not hold when: content of baskets are unknown, both choices are equally distasteful

2. Transitivity: Rules out irregular preference cycles:
if A>B  & B>C then A>C
If A~B and B ~C, then A	~C 
 If A≻B  and  B~C,	then  A≻C
 If A~B and B	≻C,	then A ≻	C	

3. More is better
   Curve is downward sloping
4. Convexity (Diminishing MRS)
   A curve exhibits diminishing MRS, willingness to give up less of one good for another when you acquire more of the latter good at a given utility. This results in bowed indifference curves

Question 2

What violates the more is better assumption?

Answer 2

If a curve isn’t downward sloping or it intersects with another curve then this would violate the fact that customers would be indifferent to a basket with more of both goods

Question 3

What is a standard rule to measure higher utility?

Answer 3

The more far away the curve is from the axes, the more higher the utility

Question 3

What is a standard rule to measure higher utility?

Answer 3

The more far away the curve is from the axes, the more higher the utility

Question 4

What is MRS?

Answer 4

MRS (Marginal rate of substitution) is the maximum amount of a good a customer is willing to give up for an additional unit of another good

MRSjf = - change in F/ change in J F= J * x

e.g if the MRS is 3 this implies the customer is willing to give up 3 units for one additional unit of the other good
If customer A has MRS of 3 and customer B has MRS of 10, customer B has the higher MRS

Question 5

What is MRS defined by?

Answer 5

MRS is defined the amount of units of the vertical axes that the customer is willing to give up to obtain one additional unit of the horizontal axis

Question 6

As the customer moves down the curve, what happens to the amount of units they are willing to sacrifice for the other good?

Answer 6

The units of Y the customer is willing to sacrifice goes down

Question 7

What is the MRS for perfect complements?

Answer 7

MRS for horizontal proportion= 0
MRS for vertical proportion= infinite
MRS at corner= undefined (no scope for substitution )

Question 7

What is the MRS for perfect complements?

Answer 7

MRS for horizontal proportion= 0
MRS for vertical proportion= infinite
MRS at corner= undefined (no scope for substitution )