Lecture 4 - Preferences Flashcards
What is a good?
A good can be anything a consumer values, not just consumption goods
Do economists judge whether an individual’s preferences are sensible?
Economists do not judge whether an individual’s preferences are sensible, they only aim at describing them
Write a statement using the correct notation stating that a consumer weakly prefers good a to good b
a b if the consumer weakly prefers a to b (‘a is at least as good as b’)
Check lecture 4 slides to confirm the symbols
What is another way of saying that a consumer weakly prefers good a to good b?
Good a is at least as good as good b
Write a statement using the correct notation showing that a consumer strictly prefers good a to good b
a b if the consumer strictly prefers a to b.
* Check lecture 4 slides to see the correct symbol*
Write a statement using the correct notation showing that a consumer is indifferent between good a and good b
a ~ b if the consumer is indifferent between a and b
What are the 3 assumptions made about preferences also known as?
The axioms of consumption theory
State the 3 assumptions made about preferences
1- Completeness: When facing a choice between two bundles of goods, a consumer can rank them so that either: they weakly prefer a to b, they weakly prefer b to a or they are indifferent between a and b
2- Transitivity: Consumer’s rankings are logically consistent in the sense that if they weakly prefer a to b and they weakly prefer b to c, then they also weakly prefer a to c
3- Non-Satiation: All else equal, more of a good is better than less
Are wealthier people on average happier than poorer people?
Using data from many countries, Stevenson and Wolfers (2013) found no evidence of a satiation point beyond which wealthier individuals have no further increases in subjective well-being
What do the 3 assumptions of preferences allow?
They allow for convenient graphical and mathematical representations of preferences
What type of goods form an indifference curve?
Equally desirable bundles of goods form an indifference curve
What is a collection of indifference curves called?
A collection of indifference curves is called an indifference map
What are the 5 properties/rules for indifference curves derived from the 3 preferences assumptions?
1- Bundles on indifference curves further from the origin are preferred to those on indifference curves closer to the origin
2- Every bundle lies on an indifference curve
3- Indifference curves cannot cross
4- Indifference curves cannot slope upwards
5- Indifference curves cannot be thick
What are the axes of an indifference curve labelled as?
The axes of an indifference curve/map are the two goods in question that are equally desirable
How does the satisfaction gained at different points on an indifference curve change at different points?
All the different points on an indifference curve mean that the user gets the same satisfaction at each of the points (indifference)
What does it mean if an indifference curve is a horizontal line?
If an indifference curve is a horizontal line this means that the user is indifferent about the good on the x-axis as at all points of consumption of the good on the x-axis the user gets the same amount of utility
What is given by the slope/gradient of an indifference curve?
- The slope of an indifference curve shows the rate at which a consumer is willing to trade one good for another
- The slope (gradient) of an indifference curve measures the marginal rate of substitution (MRS) between the two goods in question
How do we calculate the marginal rate of substitution from an indifference curve?
MRS is calculated by drawing a tangent at the desired point on the indifference curve and calculating the gradient at that point to find the marginal rate of substitution. This can be a negative number as indifference curves slope downwards
What is the marginal rate of substitution?
The marginal rate of substitution is a measure of how many of one good you are willing to give up to get more of the other good
What is the central assumption of consumer theory/preferences?
Transitivity is the central assumption of consumer theory
What is some evidence to back up the theory of transitivity demonstrating that people make consistent choices?
Weinstein (1968): experimental subjects chose between 10 good, offered in all pair-wise combinations
Bradbury and Ross (1990): give choice of pairwise combinations of three colours, faces and photos etc.
How do economists use the concept of preferences?
Economists use the concept of preferences (‘tastes’) to model how consumers rank the desirability of the goods available to them
