# L3-L5 Flashcards

Completeness

Consumer prefers one of the bundles or is indifferent between them

Transitivity

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

Non Satiation (Monotonicitiy)

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

MRS

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

How to calculate MRS

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

MRT

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

How to calculate MRT

-px/py

Interior Solution

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

How to maximise utility function subject to BC

- Find optimal ratio (MRS=MRT)
- Insert optimal ratio in BC

Corner Solutions

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

Normal Good

dqy/dM > 0

Inferior Good

dqy/dM < 0

Substitutes

dqx/dpy >0

Complements

dqx/dpy < 0

Independent goods

dox/dpy = 0