Preferences Flashcards
What is the symbol for if a consumer weakly prefers a to b
Symbol for strictly prefers a to b
Symbol for indifferent between a & b
A ~ b
What are the axioms of consumer theory?
- Completeness
When facing a choice between two bundles of goods, a consumer can rank them so either a>~b, a>b or a~b - transivity
Consumers’ ranking are logically consistent in the sense that if:a>~b and b>~c, then a>~c - Non satiation
All else equal, more of a good is better than less
What is a collection of indifference curves called?
An indifference map
What forms an indifference curve?
Equally desired bundles
What is constant along an indifference curve?
Utility / satisfaction
Where do you want to be as a consumer on indifference map?
Highest indifference curve as it represents their highest level of satisfaction
What are the 5 properties of an indifference curve?
- Bundles on indifference curves farther from origin are preferred to those closer to the origin (more is better than less)
- Every bundle lies on an indifference curve (completeness, all bundles able to be ranked)
- Curves cannot cross
- Curves cannot slope upward
- Curves cannot be thick
Why can two indifference curves for the same individual never cross?
Because if two indifference curves DID cross, the bundle at the intersection would be on both indifference curves - but a given bundle CANNOT be on two different indifference curves as each indifference curves indicates a different level of satisfaction and that would indicate conflicting preferences
Explain why these two curves crossing would not be possible
Because according to the curves, Lisa should be indifferent about e&a and e&b so by transivity if Lisa is indifferent about both of those, she should be indifferent about a&b but due to the non satiation principle this cannot be possible.
Why can’t an indifference curve slope upward?
It would tell us that the consumer is indifferent about a&b as they both lie on the same curve but by non-satiation the consumer would prefer b to a as it is higher and to the right. They contravene our assumptions thus cannot be upward sloping.
What do horizontal or vertical indifference curve tell Us?
Horizontal curves mean you’re willing to trade one thing for another at a constant rate.
Vertical curves mean you don’t want more of one thing without getting more of the other.
What is the important economic interpretation of the SLOPE of indifference curves?
Slope of indifference curves show the rate at which a consumer is willing to trade one good for another.
It measures the Marginal rate of substitution
(How many of A would Lisa give up for one more of B)?
