01 preference Flashcards
(13 cards)
What is a bundle of goods and how is it represented in economic models?
A bundle of goods is a vector x = (x₁, x₂, …, xₙ) where each xᵢ represents the quantity of good i (e.g., x = (2, 1, 3) could mean 2 e-books, 1 physical book, and 3 tomatoes).
What does the assumption of completeness mean in preference theory?
Completeness: For every pair of bundles, either x ⪰y or y ⪰x holds.
What does the assumption of transitivity mean in preference theory?
Transitivity: For any three bundles x, y , z, if x ⪰y and y ⪰z, then x ⪰z.
Yorum: Tüketicinin tercihleri tutarlıdır. A’yı B’den, B’yi C’den daha çok seviyorsa, A’yı C’den de daha çok sevmesi beklenir.
When is the consumer indifferent between x and y, and how is it written?
If both x ⪰ y and y ⪰ x hold, the consumer is indifferent between x and y. It is written as x ∼ y (or y ∼ x).
When is “x strictly preferred to y” (strict preference) and how is it written?
If x ⪰ y and y ⪰ x does not hold, then x is strictly preferred to y. It is written as x ≻ y
How do we prove x ∼ z if x ∼ y and y ∼ z?
If x ∼ y means x ⪰ y and y ⪰ x, and y ∼ z means y ⪰ z and z ⪰ y,
then by transitivity, x ⪰ z and z ⪰ x, so x ∼ z.
What does it mean for a preference to be monotonic?
A preference is monotonic if larger bundles are strictly preferred.
Formally, x ≻ y holds if x contains at least as much of each good as y and strictly more of at least one good.
What is an indifference curve?
An indifference curve shows all bundles of goods that provide the consumer with the same level of satisfaction or preference. The consumer is indifferent between any two points on the curve.
Indifference curves that are further from the origin are …. preferred / not preferred ?
preferred.
What are the key properties of indifference curves under monotonic preferences?
They are lines, not areas, because more of a good always means better.
They slope downward from top-left to bottom-right, reflecting the trade-off between goods.
Curves further from the origin represent better bundles, as they contain more of at least one good.
They do not intersect, as this would violate the consistency of preferences (this holds true whether preferences are monotonic or not).
Why is the indifference curve defined by x₁ + x₂ = constant (k) a straight line?
Because this equation shows all combinations of Good 1 and Good 2 that add up to the same total. In math, this forms a linear relationship—hence, it appears as a straight line on a graph.
When do we say that two goods are perfect substitutes?
We say that two goods are perfect substitutes when the consumer is willing to trade them at a constant ratio, meaning that the goods are interchangeable in terms of the consumer’s satisfaction. For example, if a consumer values Good 1 and Good 2 equally and is willing to trade them at a 1:1 ratio, these two goods are considered perfect substitutes.
