Microeconomics Quiz W1: Budget Constraint and Preferences

Question 1

What’s the equation for the budget constraint?

Answer 1

y = M/Pbottom rightY - (Pbottom rightX / Pbottom rightY)x AND/OR 𝑃bottom rightx 𝑥 + 𝑃bottom righty 𝑦 = 𝑀

Question 2

If we say “if A is preferred to B, B is preferred to C, then A is preferred to C” which assumption concerning consumers’ preferences we use or describe?

Answer 2

Transitivity

Question 3

Describe the three assumptions required to give consistent consumer preferences

Answer 3

1. Completeness: Any two bundles can be compared, i.e. either A ≽ B, B ≽ A, or both.
    Interpretation: The consumer is able to express an opinion on each and every pair of consumption
   bundles.
2. Reflexivity: Any bundle is at least as good as itself, i.e. A ≽ A.
3. Transitivity: If bundle A is as good as B and bundle B as good as C then A should be
   as good as C, i.e. if A ≽ B and B ≽ C then A ≽ C.
    These assumptions or preferences properties are related to the key
   assumption: the representative consumer makes rational choices

Question 4

The marginal rate of substitution (MRS) measures or represents…?

Answer 4

The slope of an IC

Question 5

The slope of an IC represents…?

Answer 5

Marginal Rate of Substitution (MRS)