# L3-L5 Flashcards

1
Q

Completeness

A

Consumer prefers one of the bundles or is indifferent between them

2
Q

Transitivity

A

If consumer prefers A to B and B to C then prefer A to C. Same if they are indifferent

3
Q

Non Satiation (Monotonicitiy)

A

Marginal increase in quantity of a good increases consumer utility (more is better)

4
Q

MRS

A

Gradient of an IC. The maximum amount of one good consumer is willing to sacrifice in order to obtain one unit of another good. MRS diminishes as gradient of IC gets flatter

5
Q

How to calculate MRS

A

= dy/dx = -(du/dx)/(du/dy) = -MUx/MUy

6
Q

MRT

A

Gradient of a BC. How much of one good has to be sacrificed in order to gain another

7
Q

How to calculate MRT

A

-px/py

8
Q

Interior Solution

A

Where indifference curve is tangent to BC at optimal point. MRS = MRT. Optimal quantities are positive for both goods

9
Q

How to maximise utility function subject to BC

A
1. Find optimal ratio (MRS=MRT)
2. Insert optimal ratio in BC
10
Q

Corner Solutions

A

Highest IC consumer can reach where optimal quantity of one of the goods is 0. MRS is > or < MRT

11
Q

Normal Good

A

dqy/dM > 0

12
Q

Inferior Good

A

dqy/dM < 0

13
Q

Substitutes

A

dqx/dpy >0

14
Q

Complements

A

dqx/dpy < 0

15
Q

Independent goods

A

dox/dpy = 0

16
Q

Ordinary good

A

Demand falls as price increases. dqy/dpy < 0

17
Q

Giffen good

A

Demand increases as price increases. dqy/dpy > 0

18
Q

Income elasticity of demand

A

% change in D for a good from a 1% increase in Income. Change in qy/ % change in M. +ve if normal good

19
Q

Cross price elasticity of demand for good Y

A

% change in demand of Y from a 1% increase in price of good X. +ve if substitutes -ve if complements