Lecture 2 - Preferences

Question 1

What does it mean if a consumer strictly prefers (x1,x2) to (y1,y2)?

Answer 1

if whenever the consumer has a choice between the two bundles, they always choose (x1, x2)

Question 2

What does it mean if a consumer weakly prefers (x1,x2) to (y1,y2)?

Answer 2

the consumer prefers (x1, x2) to (y1, y2) or is indifferent

Question 3

What does it mean if preferences are complete?

Answer 3

preferences are complete, if any two bundles (x1, x2), (y1, y2) satisfy either (x1, x2) ≽ (y1, y2), or (y1, y2) ≽ (x1, x2), or both. (In the last case, the consumer is indifferent between the two bundles)

Question 4

What does it mean if preferences are transitive?

Answer 4

preferences are transitive, if for any three bundles that satisfy (x1, x2) ≽ (y1, y2) and (y1, y2) ≽ (z1, z2), one has that (x1, x2) ≽ (z1, z2)

Question 5

What do arrows on indifference curves indicate?

Answer 5

more preferred bundles

Question 6

What is meant by perfect substitutes?

Answer 6

when the consumer is willing to substitute one good for the other at a constant rate

Question 7

What do the indifference curves look like for perfect substitutes?

Answer 7

downward sloping linear curves

Question 8

What is meant by perfect complements?

Answer 8

goods that are always consumed together in fixed proportions

Question 9

What do the indifference curves look like for perfect complements?

Answer 9

L-shaped

Question 10

What is meant by directly revealed preferences?

Answer 10

when the consumer has a direct choice between two bundles (A and B), and the consumer always choices A, we say that A is directly revealed preferred to B

Question 11

What is meant by indirectly revealed preferences?

Answer 11

• if A is directly revealed preferred to B, and B is directly revealed preferred to C
• then we say that A is indirectly revealed preferred to C