Preferences, Constraints, and Choice

A set of flashcards covering key vocabulary and concepts from the lecture on consumer preferences, constraints, and choices.

Consumer choice model

A model that helps understand how decision makers choose to best achieve their objectives given their constraints.

Bundles of goods

Collections of goods that consumers choose among, such as various combinations of apples and bananas.

Indifference curve

A curve that represents all bundles that yield the same level of utility to the consumer.

Marginal rate of substitution (MRS)

The maximum rate at which a consumer is willing to give up good 2 in exchange for good 1, keeping the same level of utility.

Utility

A numerical representation of consumer satisfaction or preferences regarding a bundle of goods.

Monotonicity

The assumption that more of a good is always preferred to less of it.

Transitivity

A property of rational preferences indicating that if a consumer prefers bundle x to y and y to z, then x is preferred to z.

Completeness

The assumption that consumers can compare all possible pairs of bundles without indecision.

Budget constraint

A limit on the consumption choices of a consumer, defined by the income and prices of goods.

Optimal choice

The selection a consumer makes to maximize their utility given their budget constraints.

Cobb-Douglas utility function

A specific type of utility function that represents preferences with a functional form of u = x1^c * x2^d.

Independence of irrelevant alternatives (IIA)

A property of rational preference relations ensuring that the choice of a bundle from a set does not change if other irrelevant options are added or removed.

Weak axiom of revealed preference (WARP)

A condition that maintains consistency in consumer choice, stating if x is chosen over y when both are available, y should not be chosen if x is also available in another set.