ECON2233 Consumer Choice 1

What is completeness?

For any two bundles of goods (or options), the consumer can rank them in one of the following manners:

What is transitivity?

The ranking of bundles is rational, in that if A is weakly preferred to B, and B is weakly preferred to C then A is preferred to C.

What is monotonicity?

More of a commodity is better. This is NOT true for bads or neutrals.

Indifference curve

A curve representing all consumption bundles that provide a consumer with the same level of satisfaction.

Indifference map

A complete set of indifference curves that summarize consumer preferences over all possible bundles.

How do we definitely know if a point of an indifferent map is less preferred to another point?

That is if the less preferred point is below and to left of the other point.

Four Assumptions about indifferent curves

1.) Bundles farther from the origin are preferred to those on indifference curves to the origin

2.) An indifference curve goes through every possible bundle

3.) Indifference curves cannot cross

4.) Indifference curves slope downward

Budget constraint

Constraint that consumers face as a result of limited incomes

Budget line

All combinations of goods for which the total amount of money spent is equal to income

Budget set/Opportunity set

All the bundles a consumer can buy including those inside the budget constraint

What is MRS

Marginal Rate of Substitution - the gradient of the indifference curve. The maximum amount of a good to give up for 1 unit of another good.

Mathematically: -MRS = -MUx/MUy

Mathematical representation of the budget line

Px.X + Py.Y = I

What is MRT

The marginal rate of transformation. It is the slope of the budget line. It is the rate at which the market is willing to exchange X for Y

Mathematical representation of MRT

-MRT = -dx/dy