topic 3 - preferences

Question 1

what are preferences?

Answer 1

they show how a consumer chooses between different combinations of goods based on what makes them happiest

Question 2

properties of preferences - completeness

Answer 2

a consumer can always compare 2 bundles and say which one they like better or equal

Question 3

properties of preferences - transitivity

Answer 3

if you prefer bundle a to bundle b and bundle c to bundle b then you also prefer a to c

Question 4

properties of preferences - monotonicity

Answer 4

more is better as long as extra doesn’t cost anything

Question 5

indifference curve

Answer 5

a graph showing all combinations of good that make a consumer equally happy - they are downward sloping, dont cross, higher curves = more happiness

Question 6

MRS

Answer 6

the mrs is the slope of the indifference curve it shows how much of one good your willing to give up for another while staying equally happy

Question 7

perfect substitutes

Answer 7

goods that can replace each other at a constant rate - straight lines

Question 8

perfect complements

Answer 8

goods that are always used together in fixed proportions - l shaped

Question 9

Cobb Douglas

Answer 9

goods that are somewhat substitutable but still needed in specific ration

Question 10

what is a utility function?

Answer 10

a formal that assigns a number to each bundle of good to show how much happiness it provides - Example: U(x1,x2) = x1 + x2 means each good adds 1 unit of happiness. it helps us rank bundles but number doesn’t matter only rank does

Question 11

for preferences to work well in models they must be

Answer 11

monotonic, convex

Question 12

what does monotonic mean

Answer 12

more is better

Question 13

what does convex mean

Answer 13

consumers prefer balanced bundles over extreme ones