We make four assumptions about preferences: completeness and rankability, “more is better,” transitivity, and consumers want variety. Briefly describe each assumption.
What does the term “utility” mean? How does utility relate to a utility function?
Define “indifference curve.” What does an indifference curve tell us about the consumer?
We learned that the slope of the indifference curve is called the marginal rate of substitution of X for Y. What does the MRSXY tell us about a consumer’s preferences between two goods?
Why does the slope of the indifference curve vary along the curve? What does this variability tell us about consumers’ preferences?
What does a steep indifference curve indicate about a consumer’s preferences? What does a flat indifference curve say?
When are two goods perfect substitutes? What does the indifference curve look like, or what is its curvature?
When are two goods perfect complements? What does the indifference curve look like?
In addition to utility, what other factors determine how much of a good to buy?
Describe the three assumptions we make when incorporating income into our model of consumer behavior.
What is a budget constraint?
What determines the slope of a budget constraint? What situation would change the slope of a budget constraint?
What do we call the bundle represented by the point of tangency between the consumer’s indifference curve and her budget constraint?
At the point of tangency, what is true about the ratio of the goods’ marginal utilities and the ratio of their prices?
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