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
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)
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
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
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
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
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
8
Q
What are the extreme cases of indifference curves?
A
- Perfect Substitutes: Have a gradient of -1, where only relative prices are considered
- Perfect Complements: ‘L’ shaped curve where the gradient is either 0 or ∞
- Neutral Goods: Have a gradient of ∞, properties of goodness/badness are paired
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
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
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