22 Cards in this Set
| Front | Back |
|---|---|
|
complete
|
a decision can be made
|
|
symmetric
|
an individual is indifferent
|
|
transitive
|
preference is "consistent"
|
|
local nonsatiation
|
no bliss points
|
|
monotonicity
|
more is better
|
|
strict convexity
|
a preference for diversity
|
|
continuity
|
no unexpected shifts in preferences
|
|
Indifference curves
|
The graphical set of all bundles of goods that an individual views equally desirable.
-Specific to the individual
-complete summary of "tastes"
-indifference map is a combo of indifference curves
-CANNOT be upward sloping
-infinite and non crossing
-Curvature tells about trade-offs …
|
|
Perfect compliments
|
-Goods that a consumer is interested in in consuming only in fixed proportions
|
|
Perfect substitutes
|
-Goods that a consumer is indifferent as to which to consume.
|
|
Marginal Rate of Substitution 1
|
The max amount of good 2 the individual would be willing to give up to get one more Good 1
|
|
Marginal Rate of Substitution (2)
|
The minimum amount of Good 2 the individual would need to receive to give up one more good 1
|
|
Marginal Rate of Substitution (3)
|
(the negative) of the derivative of the indifference curve, x2=f(x1)
|
|
Utility function
|
a mathematical function that represents an individuals preferences in a very particular way (ITS JUST A LABEL)
-Increasing utility function exists if and only if preferences are rational and monotonic
|
|
ordinal
|
no way of comparison
|
|
cardinal
|
one that tells us the relative ranking of the two things and tells us how much
|
|
Monotonic Transformations
|
1. Adding a constant
2. Multiplying by a positive constant
3. Assuming each is positive, raising to a positive power
4.Ln/Exponential
*(if the derivative of a transformation is positive, it is monotonic)
|
|
Cobb-douglas
|
Holds the property that at low levels of each good they are complementary, High levels of each, they are more substitutable
|
|
Constatn Elasticity of Substitution (CES) utility function
|
A chameleon function that can "mimic" other utility functions/
p=1 if a perfect substitute
p-->0 it becomes a Cobb-Douglas utility function
p-->-Infiniti if becomes a perfect compliment utility function
|
|
budget set
|
set of all bundles from which an individual can choose
|
|
Constrained Optimization
|
1. If preferences are monotonic, then my optimal point will be on the budget line or else monotonicity is violated
2. If preferences are rational, convex, and monotonic, then if I am consuming both goods, my optimal point will be on the budget line and will be at a point
|
|
Diminishing Marginal Rate of subsitution
|
Strictly convex preferences display a diminishing marginal rate of substitution. In other words, the more of a good an individual has compared to the other good to offset a decrease in another good.
CONVEXITY DRIVES EVERYTHING
|
Final Study Guide