ECON 321 Exam 1

We put all possible things to consume into the ___ ____

consumption set

If X is the consumption set then the domain of X is

All real numbers

We mostly assume n = ___

2

n refers to the ___ ___ ___

number of goods

An element of X is called a ____ ____

Consumption bundle

Equation for the total cost of a bundle

X = (p1 * x1) + (p2 * x2)

Consumers face _____ _____

financial constraints

A bundle that can be afforded is a ____ ____

feasible bundle

Wealth/income level of y >

0

If (p1 * x1) + (p2 * x2) less than or equal to y then

x = (x1,x2) is a feasible bundle

What does the constant M stand for?

The budget

Equation for Y

Y = m/p2 - (p1/p2)*x1

If the bundle cost is equal to the wealth or income level then

It is "perfectly afforded"

What is the opportunity cost of an additional unit of good 1 conditional on spending all of your money?

The slope of the budget line

Equation for slope of the budget line

(dx2/dx1) = (-p1/p2)

What do people base their choices on in consumer theory?

Their tastes or preferences.

What is the purpose of a preference relation?

To compare or order different consumption bundles.

What does it mean when one bundle is at least as preferred as another?

The consumer likes the first bundle at least as much as the second bundle.

Are two consumption bundles the axes of a graph?

No. Each bundle specifies amounts of goods, such as an amount of good 1 and an amount of good 2.

NOTE ON THE TEST: Can we say whether (2 apples, 1 mug) is preferred to (1 apple, 7 mugs)?

No. More information is needed because we do not know that consumer's preferences.

What does the completeness axiom mean?

You can compare any two bundles; one is at least as good as the other, or both are equally good.

What is reflexivity in the completeness axiom?

A bundle can be compared with itself and is at least as good as itself.

What does the transitivity axiom mean?

Your comparisons are internally consistent: if you prefer A to B and B to C, then you prefer A to C.

What is needed for a comparison rule to count as a preference relation?

Completeness and transitivity.

What does completeness plus transitivity give consumers?

A ranking system for consumption bundles.

What is strict preference?

You prefer one bundle to another and do not view the other bundle as at least as good as the first.

What is indifference between two bundles?

The consumer views the two bundles as equally good.

What does the continuity axiom mean?

Small changes in bundles do not cause sudden jumps or reversals in preferences.

What does local non-satiation mean?

You can always find another bundle that is strictly preferred.

What does strict monotonicity mean?

More is preferred to less.

What does convexity mean in plain English?

Consumers prefer moderate mixtures to extreme, unbalanced bundles.

What is an indifference set?

A set of bundles among which the consumer is indifferent; with a utility function, these are called indifference curves.

What are the five preference-axiom TLDRs?

Completeness: compare any two bundles. Transitivity: comparisons are consistent. Continuity: small changes do not cause sudden jumps. Monotonicity: more is better. Convexity: mixtures are preferred to extremes.

What does an "at least as good as" set contain?

All bundles the consumer considers at least as good as a particular reference bundle.

What does a "no better than" set contain?

All bundles the consumer considers no better than a particular reference bundle.

What does a "worse than" set contain?

All bundles the consumer considers worse than a particular reference bundle.

What does a "preferred to" set contain?

All bundles the consumer strictly prefers to a particular reference bundle.