units 1 .... Flashcards
what is a consumption choice set
it is the collection of all consumption choices available to the consumer. Such as : restaurant - choosing the menu.
what does x and p represent in a budget constraint
x represents a commodity xn
p represents the price of the corresponding commodity pn
Therefore if we have two goods) (n=2), the price vector is (p1,p2)
budget constraint can be represented by what equation
p1x1 + p2x2 is less than or equal to disposable income
So, price multiplied by commodity, summed, is less than or equal to disposable income.
rearrange the budget constraint p2x2= m - p1x1 to find (x2)
x2= p1/p2 x X1 + m/p2
p1x1 + p2x2 = M
when x1 is equal to 0 what is x2 equal to
m/p2
when budget constraint pivots, does income increase?
no it remains constant
if asked, what happens when p1’ decreases to p1’’. what do you do?
- you rearrange budget constraint to find out what x1 and x2 equal when the other x1 or x2 is equal to 0
what happens to the budget constraint if a tax is added on?
it will shift inwards (less budget)
qcan indifference curves intersect (IC) and why yes or why not
no they cannot. As two indifference curves cannot represent the same level of satisfaction, they cannot intersect each other
preference relations:
define x and y when there is a:
- strict preference
- weak preference
- indifferent preference
- x is more preferable than y
- x is at least as preferable as y
- x and y are equally preferable.
furthermore, to note the commodity of preference. a squiggle version of > can be used.
Explain why convex preferences means that “averages are preferred to extremes”
Because the consumer weakly prefers the weighted average of two bundles to either bundle
what is a bad and how is it sloped on a demand curve
a bad is when less of a commodity is always preferred then the commodity is considered a bad
if we have a bundle made up of a good and a bad the slope of the demand curve will be positive. this is because, to reduce a unit of the “bad”, you have to reduce the “good” to be at the same indifferent curve
what is a good and how is it sloped on a demand curve
if more of a commodity is always preferred to less then the commodity is known as a good. if every commodity is a good then indifference curves are negatively sloped. because in order to reduce one good you have to increase the other to be indifferent.
if consumers always consume comoddties 1 and 2 in flex properprtion (right and left shoe) they are ‘perfect compliments’.
yep
a bundle that is strictly preferred to any other is known as…
a satiation point
a commodity is known as ‘infinitely divisible’ if?
it can be acquired in any quantity e.g. cheese or water
a commodity is known as what if it comes in unit lumps e.g. 1,2,3 so like cars or aircrafts
discrete
when is a preference relation ‘well behaved’
if it is both monotonic and convex
define monotonicity
more of any commodity is always preferred (ie no satiation and every commodity is a good)
convexity
mixtures of bundles are (at least weakly) preferred to the bundles themselves
what does mrs measure
marginal rate of substitution measures the rate at which the consumer is willing to choose one product in sacrifice of another
dx2/dx1 measures the MRS of substitution of good 1 for good 2, or the slope of the indifference curve
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al indifference curves contain equally preferred bundles. therefore all bundles on the same indifference curve have the same utility level
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how does a good, a bad and a neutral effect utility
A good is a commodity which increases utility with additional consumption
A bad is a commodity that decreases utility with additional consumption
A neutral is a commodity that doesn’t change utility with additional consumption
a utility function of the form u(x1,x2) = x1 power of a x2power of b
its called a ‘Cobb- Douglas utility function
shape of downwards sloping L
with a > 0 and b > 0
the marginal utility of commodity ‘I’ is?
the rate of change of total utility as the quantity of commodity I consumed changes
the marginal rate of substitution can be expressed to derive x1 over x2 to equal positive p1/p2
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what is an ordinary good
this is where the demand for a good always increases as price decreases.
what is a giffen good
a giffen good is where the quantity demanded of a good rises as its own price increases then the good is called giffen
what is an engel curve
it is a curve that has been plotted with demand agaisnt income
what is an inferior good
Inferior goods are goods that see a decrease in demand as income increases. For example, gruel and shacks.
on a perfect compliments curve how is the income offer curve/engel curve positioned
through the origin of each of the bundles kinda curve and straight sloped
what type of good is it If demand for a good goes up by a greater proportion than income it’s called a ?
luxury good
If demand for a good goes up by a lesser proportion than income it’s called a ………. good
necessary good
rate of change of demand curve is typically represented by what equation
dx1/dp1 < 0
if the demand for good 1 goes up when price of good 2 goes up, we say good 1 is a substitute for good 1. what is the equation for rate of change of a substitute
dx1/dp2 > 0
if demand for good 1 goes down when price of good 2 goes up, we say good 1 is a complement to good 2. this can be represented by equation
dx1/dp2 < 0
shape of a strictly convex demand curve
curved
If X is revealed to be preferred to Y does that automatically mean that X is preferred to Y? and why?
Answer: no
This is because “revealed preferred” just means that X was chosen when Y was affordable;”preference” means that the consumer ranks X ahead of Y.
practice all one one question including axiom in notes warp
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what does warp state
This axiom states that given incomes and prices, if one product or service is purchased instead of another, then, as consumers, we will always make the same choice.
what is warp used for
It is important to understand that WARP is a condition that must be satisfied by a consumer who is always choosing the best things he or she can afford.
Warp is used to check if the economic entity or consumer is selecting the optimum bundle.
what are index numbers used for
Are consumers better or worse off overall as a consequence of price changes: index numbers give approximate answers to such questions.
Eugen Slutsky discovered: changes to demand from a price change are always the sum of a pure substitution effect and an income effect.
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This “intermediate” budget line is attempting to hold real income fixed so we can isolate the substitution effect.
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