CHAPTER 4: TASTES + INDIFFERENCE CURVES

Question 1

Assuming a consumer chooses the best bundle they can afford. How much a customer likes a bundle depends on their

Answer 1

Tastes
Tastes are subjective and differ across people

Question 2

2 fundamentally rational assumptions about tastes:

Answer 2

Rationality Axioms:

Complete tastes

Transitive tasts

Question 3

If both assumptions (axioms) hold we say the individual has

Answer 3

Rational taste

Question 4

Complete trusts

Answer 4

Individuals can always make comparison between bundles. You either prefer a to b, or b to a or you are indifferent between the two.

Question 5

Transitive tastes

Answer 5

Given complete tastes, If a is preferred to b and b is preferred to c then a is preferred to c.

Question 6

Bundle of n goods

Answer 6

(X1, x2, …xn) an element of R^n+

Question 7

> wiggly

Answer 7

At least at good as

Question 8

>

Answer 8

Strictly prefered

Question 9

Monotonicity

Answer 9

More is better, at least not worse.
More of all goods = strictly prefered
More of some goods and no less of others = at least as good as

Question 10

Convex it’s

Answer 10

Averages are better than extremes, or at least not worse.
If indifferent between A and b. Weighted average of A and B is at least as good as A or B.
If the average is strictly better = strict convexity

Question 11

Continuity

Answer 11

No sudden jumps.
Preference ordering over bundles so not suddenly change because of tiny changes in bundles

Question 12

Indifference curve containing A

Answer 12

Is the set of bundles a consumer is indifferent between relative to A.

Question 13

Slope of indifference curve is negative is

Answer 13

More = better, monotonicity.

Question 14

If something is strictly better then it cannot

Answer 14

Be on the indifference curve,

Question 15

Diminishing MRS implies

Answer 15

Convecxity

Question 16

MRS

Answer 16

Number of goods ont he vertical axis a consumer is willing to give up in order to get one more unit of the good on the horizontal axis.

Question 17

Slope of the budget line vs MRS

Answer 17

Slope = has to give up
MRS = willing to give up

Question 18

Indifference curves representing a single individuals tastes can

Answer 18

Never cross, this could violate transitivity.

Question 19

Numbers on indifference curves

Answer 19

Differentiat the curves
Larger numbers = larger staisfaction

Question 20

As numerical label increases as we get more north east implies

Answer 20

Monotonic tastes

Question 21

Vertical plane of utility function

Answer 21

Utility number.
Higher utility number = more stuff

Question 22

Horizontal plane of the utility function

Answer 22

Points x1, x2

Question 23

Monotionicity increases as
What does this imply?

Answer 23

Units of each good in a bundle increase, implies upwards sloping utility function.

Question 24

Taking a horizontal slice of the function at utility level 2, gives

Answer 24

the set of bundles that result at utility level 2.

Question 25

As long as the shapes + indifference curves are unaffected and the ordering of utility labels is unchanged,

Answer 25

A transformed utility function represents the same underlying tastes as the original function.

Question 26

What are transformed utility functions called

Answer 26

Positive mono tonic transformations

Question 27

MRS = Equation + definition

Answer 27

Slope of the indiff curve Change in x2 / change in x1 MRS(x1,x2) = -du/dx1 / du/dx2

Question 28

Preferences are monotone if

Answer 28

At least as much is at lease as good as and more of everything is strictly better

Question 29

Convex =

Answer 29

Decreasing MRS

Question 30

Positive monotone transformation

Answer 30

1/u = 1/x1x2 > 0