Preferences

Question 1

What are the axioms of consumption theory

Answer 1

• Completeness
• Transitivity
• Non-satiation

Question 2

Explain the axiom of completeness

Answer 2

When facing a choice between two bundles of goods, consumers can rank them.

Question 3

Explain the axiom of transitivity

Answer 3

Consumers rankings are logically consistent so that if a>b and b>c then a>c

Question 4

Explain the axiom of non-satiation

Answer 4

More of a good is better than less. Essentially the need to keep consuming

Question 5

Example of the theory of non-satiation

Answer 5

2005 survey of wealthy U.S. citizens who were asked, “How much wealth do you need to live comfortably?”
On average, those with a net worth of over $1 million said that they needed $2.4 million to live comfortably, those with at least $5 million in net worth said that they need $10.4 million, and those with at least $10 million wanted $18.1 million.

Question 6

What do lines on an indifference curve display

Answer 6

Equal amounts of satisfaction

Question 7

How does the theory of non-satiation link to indifference curves

Answer 7

It states that you will always be most satisfied when consuming more

Question 8

Name the 5 important properties of indifference curves

Answer 8

• bundles further from the origin are preferred than those closer to the origin (non-satiation)
• every bundle lies on an indifference curve (completeness)
• indifference curves cannot cross
• they cannot slope upwards
• they cannot be thick

Question 9

Why can indifference curves not cross

Answer 9

It clashes with the theory of transitivity (see slide 15 on preferences lecture)

Question 10

Why can indifference curves not slope upwards

Answer 10

Everything on an indifference curve should give the same satisfaction (indifferent) but by non-satiation, the consumer should prefer the bundle of more consumption. Again see slide 15

Question 11

What does the gradient of an indifference curve measure

Answer 11

The marginal rate of substitution

Question 12

What is the point of marginal rate of substitution (MRS)

Answer 12

MRS measures how much of one good a consumer is willing to trade for more of another good while maintaining the same levels of satisfaction

Question 13

Explain the concept of the diminishing rate of MRS

Answer 13

As you progress along an indifference curve, and you have significantly less of one good, you are less willing to trade for more of the second good.