Theory of Individual Behaviour Flashcards
What are the properties of consumer bundles?
- Completeness: For any two bundles of goods either:
- More is Better
- Diminishing marginal rate of substitution
- Transitivity
What is the budget set?
PxX + PyY ≤ M
What are the 2 forms of the budget line?
- Budget Line: PxX + PyY = M
- Y = (M/Py) - (P/Py)X
What are the properties of indifference curves?
- Utility is constant along the indifference curve
- Transitivity assumption means ICs cannot cross
- MRS: slope
- Diminishing MRS
- MUx.∆X + MUy.∆Y = 0: ∆Y/∆X = MUx/MUy
Where do individuals optimise?
- MUx/MUy = Px/Py:
- MUx/Px = MUy/Py
- Consumption bundle where the rate a consumer chooses to trade between goods equals the rate at which these goods are traded in the market
- Quantity will be y and x of the equation that = MRS
What does it tell us if Y falls when Px falls?
Since Y falls when Px falls, the goods are substitutes
How will food stamps affect a budget constraint?
Shift outward but NOT extend any higher than original Y intercept
What is true of discounts in budget constraint optimisation ?
- A discount above a certain quantity of output for good x will never result in an optimisation point at the quantity of x - a normal smooth convex IC will never be tangent to the budget line at qx = x
- If the two are perfect complements, they might choose x
What is true of gift certificates and inferior goods?
If other goods are inferior, than a consumer will be indifferent between $50 increase in income (cash) and a $50 gift certificate for good x
What are the intercepts of the budget constraint?
M/Py and M/Px
If the MRS of Perf Subs is > Px/Py, which good is consumed?
X
If the MRS of Perf Subs is ≤ Px/Py, which good is consumed?
Y
When both intercepts are given how is the slope defined?
Rise/Run
When will a price decrease result in quantity demanded dropping?
When Inferior AND IE > SE
What is most important with perfect complementary utility curves?
Draw S line i.e. b/a
