Preferences

Question 1

What are the 3 main properties of preferences?

Answer 1

• Completeness
• Transitivity
• Monotonicity

Question 2

What does the Completeness of preferences mean?

Answer 2

We assume that any two bundles can be compared. The consumer either weakly prefers one bundle to another or is indifferent between the two.

Question 3

What does the Transitivity of preferences mean?

Answer 3

If the consumer thinks that X is at least as good as Y and that Y is at least as good as Z, then the consumer
thinks that X is at least as good as Z

Question 4

What does the Monotonicity of preferences mean?

Answer 4

Consumer preferences are such that greater consumption of a good always offers him a higher level of satisfaction

Question 5

Why does the Monotonicity of preferences rule out upward sloping indifference curves?

Answer 5

This is because a positive gradient would suggest that the consumer needs a greater bundle for the same level of satisfaction

Question 6

What is another main implication of Monotonicity?

Answer 6

Bundles that lie above an indifference curve are strictly

preferred to any bundle that lies on that indifference curve

Question 7

Why can indifference curves never cross?

Answer 7

If c was on the higher curve and intersected the lower curve at point b, and a was on the lower curve then transitivity dictates: a∼b, b∼c ∴ a∼c. This violates the laws of monotonicity which states a≺c

Question 8

What is the convexity of preferences?

Answer 8

Given two bundles where one is weakly preferred to the other a weighted average of the two bundles will be preferred to the less preferred bundle

Question 9

What does the gradient of an indifference curve represent?

Answer 9

The marginal rate of substitution (MRS)

Question 10

What is the gradient of the indifference curve for perfect substitutes?

Answer 10

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