ECON 401 Chapter Notes - Chapter 3: Chocolate Syrup, Indifference Curve, Substitute Good

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Chapter 3: Preferences

• Eooi oept of est thigs

• Consumption bundles: the objects of consumer choice; complete list of the goods and

services that are involved in choice

3.1 Consumer Preferences

Strictly preferred

≻

Indifferent

Weakly prefers

≽

3.2 Assumptions about Preferences

1. Complete: any 2 different consumption bundles can be compared; given any given x-

bundle and y-bundle, we assume that ,  ≽ ,  or ,  ≽ ,  or both

which means , ~, 

2. Reflexive: any bundle is at least as good as itself; ,  ≽ , 

3. Transitive: if ,  ≽ ,  and ,  ≽ , , then we assume ,  ≽

, 

3.3 Indifference Curves

• Indifference curve: describes preferences graphically; the bundles for which the

consumer is just indifferent to , 

• Weakly preferred set: all of the consumption bundles that are weakly preferred to

bundle , , includes the indifference curve

• Indifference curves representing distinct levels of preference cannot cross. does’t

satisfy transitive assumption).

3.4 Examples of Preferences

• For a given change in good 1, how does good 2 have to change to make the consumer

just indifferent between + ∆, + ∆ and , ?

o In other words, if we increase good 1 consumption, how much will we have to

hage the seod good’s osuptio to get ak to the origial idifferee

curve?

• Perfect substitutes: if the consumer is willing to substitute one good for another at a

constant rate (not always a 1-for-1 tradeoff)

o How much you have to tradeoff is the slope of each line. Will always be

linear/have constant slope.

• Perfect complements: goods that are always consumed together in fixed proportions. L-

shaped indifference curve, with the vertex of the L occurring where the number of good

1 is suited to the number of good 2 consumed (not always 1-for-1, can be 1 scoop of ice

cream and 3 scoops of chocolate sauce). Increasing the number of both goods will move

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A. True, False, Uncertain and Explain: determine whether the statement is true, false or uncertain and explain your reasoning â you only earn points for your explanation. 1. If preferences are convex, the set of points at least as good as any given point is a convex set. 2. If preferences are strictly convex, the set of points âno better thanâ any given point is a convex set. 3. If a consumer has strictly convex preferences over two goods and she is indifferent between bundle A given by (4, 6) and bundle B given by (2, 8), then she prefers bundle C given by (3, 7) over either bundle A or bundle B. 4. If a consumer has preferences over two "bads" then these preferences cannot be convex. 5. If apples (a good) are on the horizontal axis and dirty socks (a bad) are on the vertical axis then the indifference curves that represent convex preferences over these two items is upward sloping and flattens out as moving from left to right. 6. If preferences are not monotonic then they cannot be transitive

budget line

marginal utility

complete property of preferences

market demand

consumption bundle

substitution effect

Giffen good

total effect

income effect

transitive property of preferences

indifference curves

utility

the marginal rate of substitution

utility function

1.	_____	The satisfaction or benefit that consumers receive from consuming goods or services.
2.	________________ _	A particular combination of specific quantities of goods or services
3.	________________ _	Consumers can rank all conceivable bundles of goods or services
4.	_____	If A is preferred to B, and B is preferred to C, then A is always preferred to C.
5.	_____	Equation showing a consumerâs perception of the total utility forthcoming from consuming each bundle of goods and services.
6.	_____	A set of consumption bundles each and every one of which provides a consumer with exactly the same level of total utility.
7.	_____	The number of units of Y that must be given up for total utility to remain the same when one more unit of X is consumed.
8.	_____	The addition to total utility attributable to consuming one more unit of a good, holding the consumption of all other goods constant.
9.	_____	The line showing all bundles of goods that can be purchased at given prices if the entire income is spent.
10.	_____	The change in the consumption of a good that would result if the consumer remained on the original indifference curve after the price of the good changes.
11.	_____	The change in consumption of goods results strictly from the change in purchasing power after the price of a good changes.
12.	________________ _	The sum of the substitution and income effects.
13.	_____	A good for which quantity demanded varies directly with price, causing an upward sloping demand curve.
14.	_____	A list of prices and the corresponding quantity consumers are willing and able to purchase at each price.

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ECON 401 Chapter Notes - Chapter 3: Chocolate Syrup, Indifference Curve, Substitute Good

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