3- Consumer Preferences

Question 1

What is the difference between positive and normative economics?

Answer 1

• Positive Economics: Explains how things are, like how consumers and businesses make decisions to get the most benefit.
• Normative Economics: Looks at how things should be, like what policies the government should use to improve well-being

Question 1

What is utility in consumer theory?

Answer 1

• Utility is a measure of satisfaction or happiness that a consumer gets from goods or services.
• In modern economics, utility focuses on consumer preferences—what people choose when given different options

Question 2

What are the three types of utility?

Answer 2

• Welfare: How well-off people are, which the government aims to improve.
• Happiness: How content people feel.
• Preference: What people choose if they have the option; the focus of modern economics

Question 3

What did John Hicks contribute to consumer theory?

Answer 3

• In the 1930s, John Hicks introduced ordinal utility, which ranks choices without measuring intensity.
• This approach simplified predicting consumer behaviour without needing exact numerical values for utility

Question 4

What are the key properties of consumer preferences?

Answer 4

1- Completeness: Consumers can compare and rank all choices.

2- Transitivity: If a consumer prefers A over B and B over C, they also prefer A over C.

3- Non-satiation: More is always better.

4- Continuity: Preferences change smoothly with small changes in goods.

5- Convexity: A mix of goods is usually better than extremes

Question 5

What is an indifference curve?

Answer 5

• An indifference curve shows all the combinations of goods that give a consumer the same level of satisfaction.
• These curves are downward-sloping because more of one good means needing less of another to stay equally satisfied

Question 6

What is the Marginal Rate of Substitution (MRS)?

Answer 6

• MRS is how much of one good a consumer is willing to give up for another without changing overall satisfaction.
• It is shown by the slope of the indifference curve at a specific point

Question 7

What is the diminishing Marginal Rate of Substitution?

Answer 7

• As you move along an indifference curve, the willingness to trade one good for another decreases.
• This means people prefer balanced combinations of goods more than having just one type

Question 8

How does altruism affect consumer preferences?

Answer 8

• Altruism means caring about others, which can lead people to make choices that help others instead of just focusing on themselves.
• People may choose to donate or help others because they value others’ well-being

Question 9

What are economic “bads”?

Answer 9

• Economic “bads” are things that reduce satisfaction when you have more of them, like pollution.
• For economic bads, the indifference curve slopes upward because more of the “bad” reduces happiness

Question 10

What are some critiques of equating welfare with happiness?

Answer 10

• Amartya Sen’s Critiques: Sen argued that focusing only on happiness ignores other values, like freedom or health.
• He suggested using capabilities to measure well-being, which includes the ability to achieve what people value

Question 11

What are the properties of indifference curves?

Answer 11

• Ubiquitous: Every bundle has an indifference curve.
• Downward-Sloping: More of one good means needing less of another to stay equally satisfied.
• Cannot Cross: Indifference curves cannot intersect.
• Diminishing Slope: The curve becomes less steep, reflecting diminishing MRS

Question 12

How does happiness relate to consumer choices?

Answer 12

• Not all choices are made to maximize immediate happiness. People may make choices based on long-term goals that are valuable in other ways.
• For example, saving money for future security or investing in education may not bring immediate happiness but contribute to a fulfilling life