Chapter 2- Consumer Preference Theory

What does it mean if a consumer is indifferent between two basket goods?

The consumer values both basket of goods equally and has no preference between them. This is represented by both goods lying on the same indifference curve

What does the completeness assumption state?

A consumer can always compare any two consumption baskets and determine a preference or indifference.

What does transivity mean?

If A ≻ B and B ≻ C, then A ≻ C.

What is the monotonicity assumption?

More of a good is always preferred to less

What does an indifference curve represent?

A set of consumption bundles that provide the same level of utility to a consumer.

Why are indifference curves downward-sloping when monotonicity holds?

if one good decreases, the other must increase to maintain the same utility level.

Why can’t indifference curves intersect?

If they did, it would violate the principle of transitivity, as a consumer would be indifferent between two different utility levels.

What does it mean for preferences to be “well-behaved”?

Indifference curves are convex, showing a diminishing marginal rate of substitution.

What is the marginal rate of substitution (MRS)?

The rate at which a consumer is willing to give up one unity of good y for one unit of good x while maintaining the same utility.

What happens to the MRS as we move along a convex indifference curve?

It diminishes, meaning the consumer is willing to give up less of good y for more of good x