Topic 3 - Preferences

Question 1

Strictly preferred

Answer 1

(x1,x2) > (y1, y2). Consumer will always choose (x1, x2) over (y1, y2) when both are available.

Question 2

Indifferent preferences

Answer 2

(x1, x2) = (y1, y2).
Customer equally satisfied with either bundle.

Question 3

Weakly prefers

Answer 3

(x1, x2) >/= (y1,y2).
Customer prefers or is indifferent between the bundles.

Question 4

Axioms of consumer theory: Complete

Answer 4

Any two bundles can be compared.
(x1,x2)>/=(y1,y2) or (y1,y2)>/=(x1,x2) or both

Question 5

Axioms of consumer theory: Reflexive

Answer 5

Any bundle is at least as good as itself.
(x1,x2)>/=(x1,x2)

Question 6

Axioms of consumer theory: Transitive

Answer 6

A hypothesis of consumer behaviour.
If (x1,x2)>/=(y1,y2) and (y1,y2)>/=(z1,z2) then (x1,x2)>/=(z1,z2).

Question 7

Weakly preferred set ICs

Answer 7

ICs can be drawn through any point (x1,x2). They cannot intersect though due to transitivity.

Question 8

Perfect substitutes

Answer 8

Consumer willing to substitute one good for another at a constant rate. E.g. blue and black pens. Curves have a constant negative slope. ICs move right and up for better curves.

Question 9

Perfect compliments

Answer 9

Consumer always wants to consume the goods in fixed proportions to one another. E.g. Left and right shoes. There is no benefit from increasing one good but not the other. Is are L shaped and move right and up

Question 10

Bads

Answer 10

A bad is a commodity that the consumer does not like. Positively sloped lines. ICs will move away from the bad. The more bad consumed the more the individual has to be compensated.

Question 11

Neutral good

Answer 11

A consumer does not care about a neutral good. Zero economic value to the person. ICs are straight and move in the direction to receive more of the preferred good.

Question 12

Satiated preferences

Answer 12

The overall best bundle,
(x1bar, x2bar). Consumer better off the closer to this they get. Ics are circular and move towards saturation point.

Question 13

Monotonic preferences

Answer 13

Well behaved ICs. Before saturation point. More is preferred to less e.g. curve moves away from origin.

Question 14

Convex preferences

Answer 14

Average bundle is preferred

Question 15

Nonconvex preferences

Answer 15

Extremes are preferred to averages

Question 16

Concave preferences

Answer 16

Consumers move away from the average.

Question 17

Marginal rate of substitution (MRS)

Answer 17

Rate at which consumer is just willing to substitute a little more consumption of good 2 for a little less of good 1.
MRS=change in x2/ change in x1. Negative always goes in the numerator.