Preferences and Utility

Question 1

Where does the optimal point exist?

Answer 1

When the budget constraint intersects the IC

Question 2

What are the 3 axioms of consumer preferences?

Answer 2

Completeness (consumer prefers one of the bundles to the other/is indifferent to the bundles)

Transitivity (if consumer prefers a to b, and b to c, then they prefer a to c (same for indifference))

Monotonicity (non-satiation) (any marginal increase in quality of goods > increase consumer utility)

Question 3

Define MRS

Answer 3

The max. amount of one good that a consumer is willing to sacrifice to gain one more unit of another good

Question 4

What does MRS represent?

Answer 4

The gradient of the IC

Question 5

What’s the formula for MRS?

Answer 5

-(dU/dX/dU/dY) = -MUx/MUy

Question 6

Illustrate the different special forms of indifference curves

Answer 6

Perfect complements = good Y and good X on axes, 2 L shapes
Perfect substitutes = Y and X on axes, 2 parallel lines touching axes
Quasi-linear preferences = e.g. U = X^0.5 + Y, IC curves touching y-axis

Question 7

What are the different properties of IC curves?

Answer 7

Utility is increasing in the distance from the origin

An indifference curve passes through every possible bundle