Preferences Flashcards

Week 2

1
Q

What are Behavioural Postulate principles?

A
  • A decision-maker always chooses their most preferred alternative from their set of alternatives
  • We must model preferences to understand choices
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2
Q

Name the different kind of ranked preferences

A
  • Strict preferences- X is preferred to Y (x>y)
  • Weak preferences- X is at least as preferred to as Y (x≥y)
  • Indifferent preferences- X and Y are equally preferred (X~Y)
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3
Q

What are some of the assumptions around preference (properties of I.C)?

A
  • Completeness: For any two bundles x and y, you are always able to say you prefer either x or y
  • Reflexivity: Any bundle x is always at least preferred to itself
  • Transitivity: If x>y and y≥z, then x>z
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4
Q

How is a set of bundles constructed?

A
  • All bundles that are equally preferred to x’ are within the set
  • This can be plotted along an indifference curve
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5
Q

What is the difference between WP(x) and SP(x) concerning indifference curves?

A
  • WP(x) includes the indifference curve because the bundles are weakly preferred to x
  • SP(x) excludes the indifference curve because the bundles are strongly preferred to x
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6
Q

What are some properties of indifference curves?

A
  • Cannot intersect
  • Any bundle on a curve above I0 means this is better than a bundle on I0
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7
Q

When is a commodity a ‘good’ or a ‘bad’?

A
  • If more of a commodity is always preferred to less of a commodity, it is a good and has a negatively sloped indifference curve
  • If more of a commodity is never preferred to less of a commodity, it is a bad and has a positively sloped indifference curve
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8
Q

What are the extreme cases of indifference curves?

A
    1. Perfect Substitutes: Have a gradient of -1, where only relative prices are considered
    1. Perfect Complements: ‘L’ shaped curve where the gradient is either 0 or ∞
    1. Neutral Goods: Have a gradient of ∞, properties of goodness/badness are paired
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9
Q

What are the two qualities that are satisfied a if preferences are well-behaved?

A
  • Monotonic (Negatively sloped)
  • Convexity (Shape), assumed that a consumer prefers a mix of goods
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10
Q

What is the slope of an indifference curve

A
  • Marginal Rate of Substitution, where the line is tangential to the curve
  • Steep tangents mean that the MRS is high
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11
Q

Expand more on the idea of MRS

A
  • MRS = dx2 / dx1
  • At x1, MRS is the rate at which the consumer is exactly willing to exchange good 2 to good 1
  • Slope of the budget constraint is the opportunity cost of foregoing any other good
  • MRS is often negative
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