Week 2 Flashcards
How do we model consumer preferences?
we use preference relations
What are the 3 preference relations and their signs.
What are the 3 axioms about consumer preference?
Completeness - We assume that any two bundles can be compared.
Reflexive - We assume that any bundle is at least as good as itself.
Transitive - If x weakly preferred to y and y weakly preferred to z, then we assume x is weakly preferred to z.
What do the 2 axioms of completeness and transitivity imply on the bundles in figure below.
What are the 3 axioms that give structure and remove thick areas form the indifference turning them into to curves.
Locally non-satiated: among the bundles that are close to a point x, no matter how close we get, there is at least one bundle that is strictly proffered to x.
Weakly monotonic: bundles that have more of both goods are strictly preferred.
Strictly monotonic: bundles that have more of at least one good and not less of the other good are strictly preferred.
Draw the difference between the axiom of locally non-satiated and weak and strict monotonicity.
What are the axioms that give structure and curvature to the indifference curves.
weak convexity implies consuming goods combined is weakly preferred to consuming them separately.
strict convexity implies consuming goods combined is strictly preferred to consuming them separately.
Draw 4 scenarios of indifference curves that have different preferences. 2 with Good/Bad goods, 1 with Bad/Bad goods and 1 with a bliss point. Explain them.
What is the procedure for constructing indifference curves given a verbal description.
- Put pencil on graph at some bundle (x1,x2)
- Think about giving more of good 1 (delta x1) to the consumer to move him to (x1 + delta x1, x2)
- Think how would you change consumption of x2 to make this consumer indifferent to the original consumption point. This is change (delta x2)
- Now for a given change in good 1 how does good 2 have to change to make consumer indifferent between (x1 + delta x1, x2 + delta x2) and (x1,x2) .
- Once you have the movement keep going and you will get your curve.
What are the slopes of indifference curves called and what do they tell us.
They are known are the marginal rate of substitution (MRS). The rate measures the willingness of of a consumer to substitute both goods and remain indifferent.
What is the MRS at point x’ and x’’
MRS is high at x’ and MRS is low at x’’
