Indifference curves Lecture 7

Question 1

Bundles meaning

Answer 1

Something that consumers are buying
e.g.
bundle A- 3 beers and 3 pizza
bundle B- 1 beer and 1 pizza

Question 1

how do consumers make decisions

Answer 1

they decide what they want
they decide what they can do

Question 2

What do the first 2 axioms represent

Answer 2

what do we expect of a rational buyer

Question 3

what do the last 3 axioms represent

Answer 3

what do we expect of most people most of the time

Question 4

what is axiom 1

Answer 4

Completeness

Question 5

Completeness meaning

Answer 5

The bundles can be ranked

Question 6

what does A>B mean

Answer 6

A is definitely preferred than B
A is strictly preferred than B

Question 7

what does B>A mean

Answer 7

B is definitely preferred than A
B is strictly preferred than A

Question 8

what does A∼B mean

Answer 8

A is as good as B

Question 9

what does A≥B mean

Answer 9

A is as good as B or better
A is weakly preferred to B

Question 10

What does B≥A mean

Answer 10

B is as good as A or better
B is weakly preferred to A

Question 11

What is Axiom 2

Answer 11

Transitivity

Question 12

Transitivity meaning

Answer 12

All bundles can be ranked consistently
no indifference curves can be crossed
e.g.
1) A>B
2) B>C
If 1 and 2 hold
then we can infer that A>C
Rank- A>B>C

Question 13

1) A>B
2) B>C
If 1 and 2 hold
then we can infer that A>C
Rank- A>B>C

If the example is true then what do we call the consumer

Answer 13

We call them perfectly rational

Question 14

What is Axiom 3

Answer 14

Continuity

Question 15

Continuity meaning

Answer 15

Similar bundles have similar rankings
e.g.
If A is strictly preferred to B
B is ‘close’ to C
then A is (weakly) preferred to C

In numerical terms if B is (3,5) beer to pizza and C is (4,5) beer to pizza there are infinite numbers between the 2 points but as point B and C are closer together compared to A.

Question 16

What happens if there is no continuity axiom

Answer 16

You cannot compare bundles because between bundles there are an infinite amount of numbers and then you wouldn’t be able to say which one is similar so we wouldn’t be able to rank them

Question 17

What is Axiom 4

Answer 17

Monotonicity

Question 18

Monotonicity meaning

Answer 18

more is preferred to less
e.g.
If A has more of both goods than B
Then
A>B

Question 19

example of monotonicity

Answer 19

A= (5,5) Beers to Pizza
A is better than any bundle from (0,5) to (5,0)
Any bundle which has more Beer but the same amount of pizza is better than A
Any bundle which has more Pizza but the same amount of Beer is better than A

any bundle which has less of one but more than the other of A has an unknown preference.

Question 20

What is Axiom 5

Answer 20

Convexity

Question 21

what is Convexity

Answer 21

Averages are preferred to extremes.
e.g.
If A is indifferent to B and C on a line connecting A and B
C is weakly preferred to A and B

This is because everything on one indifference curve is equally preferred but because of convexity C is an average so it’s slightly more preferred.

Question 22

utility meaning

Answer 22

level of satisfaction an individual gets form consuming a good

Question 23

what is the unit for utility

Answer 23

utils

Question 24

what type of concept is utility data analysis way

Answer 24

its an ordinal concept only ranking and order matters e.g. A yields 80 utils and B yields 800 utils. wrong- B is ten times better than A correct- B is strictly preferred to A

Question 25

indifference curve meaning

Answer 25

curves join bundles for which a person receives the same total utility.

Question 26

What happens without continuity

Answer 26

we wouldn't be able to draw a curve as it considers decimals

Question 27

Rules of drawing indifference curves

Answer 27

indifference curve shows the preference that we want to show any 2 indifference curves do not cross

Question 28

what does an upwards indifference curve show

Answer 28

that the person could have more goods but having more or less of the goods does not change the utility

Question 29

when does an indifference curve have more utility

Answer 29

when the curve is further away from the origin

Question 30

diminishing marginal utility meaning

Answer 30

after a certain point level of consumption utility decreases level of satisfaction decreases as you consume more

Question 31

properties of indifference curves

Answer 31

they are made of bundles joins bundles for which a person recieves the same total utility 2 indifference curves cannot cross furthest from the origin has greater utility (opposite for pollution) they are usually negatively sloped