microeconomics ch 4
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what is a preference?
a consumers likes and dislikes
what is the ranking principle?
a consumer can rank in order of preference all potentially available alernatives.
what is being indifferent?
liking or disliking two alternatives equally
what is the choice principle?
among the available alternatives, the consumer selects the one that he ranks the highest
what is a consumption bundle?
the collection of goods that an individual consumes over a given period such as an hour, a day a month a year or a lifetime
what is the more is better principle?
when one consumption bundle contains more of every good than a second bundle, a consumer prefers the first bundle to the second
what is an indifference curve?
it shows all the other alternatives that a consumer likes equally well
what are some of the properties of indifference curves?
- 1. They are thin
- 2. They do not slope upwards
- 3. the indiffernce curve that runs through consumption bundle A seperates all the better than A bundles from the worse than A bundles
what is a family of indifference curves?
a collection of indofference curves that represent the prefrences of the same individual
what are some of the properties of families of indifferenc curves?
- 1. they do not cross
- 2. in comparing any two bundles, the consumer prefers the one located on the indifference curve that is furthest from the origin. this means that for any bundle A, the better than A bundles lie to NE of the indifference curve. for those that are worse off, they lie to the SW of the origin
the marginal rate of substitutionfor X with Y
the arte at which a consumer must adjust Y to maintain the same level of well being when X changes by a tiny amount from a given starting point. mathematically, if a change in X is the tiny change in X and the change in Y is the adjustment to Y then MRSXY= -change in Y/ change in X
what determines a declinig MRS
if it becomes flatter as we move along the curve from the NW to the SE
what are perfect substitutes?
2 products are perfect substitutes if they are valuable only when used together in fixed proportions.
what are perfect complements?
2 products are perfect complements if they are valuable only when used together in fixed proportions
what is utility?
a numeric value indicating the consumers well being the higher the utility, the higher the satisfaction than lower utility
what is a utility function ?
a mathematical function that assigns a utility value to each consumption bundle
what is an ordinal preference?
it allows us to determine only whether one alternative is better or worse than another.
what is cardinal information
tells us something about the intensoty of those preferences. it answers the question, " how much worse?" or how much better?
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