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Microeconomics
Semester 1
Lesson 7
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Created by
Matezik Sebestak
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Cards (30)
What is the focus of Topic 2 in the study material?
It looks at how individuals make their
decisions
.
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What is the assumed relationship between price and quantity demanded?
Lower price
increases
quantity demanded.
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What is the assumed relationship between wage and quantity supplied?
Higher wage
increases quantity supplied.
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What is the problem with the assumed relationships in consumer behavior?
They may not hold true for all
goods
.
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What is the purpose of developing a theory of individual choices?
Model underlying behavior
behind demand & supply curves
Understand important aspects of individuals’ behavior
Provide a framework to understand effects of
government policy
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What does consumer theory examine?
How a person makes sensible decisions under
scarcity
.
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What is the first step in the decision-making process according to the lecture?
What
individual
wants to do.
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What is the second step in the decision-making process?
What
individual
can do.
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What is the third step in the decision-making process?
The Decision
.
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How are consumer preferences represented in the study material?
Represented through
bundles
of
goods
Assumed only two goods for
simplicity
Example
bundles: A = (
3, 3
), B = (
4, 1
), C = (
1, 4
), D = (
3, 2
)
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What are the four bundles of beer and pizza mentioned?
A = (
3
, 3), B = (
4
,
1
), C = (1, 4), D = (3,
2
).
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What are the five axioms of consumer theory?
Completeness
,
Transitivity
,
Continuity
,
Monotonicity
,
Convexity
.
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Why do we have axioms in consumer theory?
To have the simplest possible theory and make clear hidden
assumptions
.
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What does Axiom 1: Completeness state?
All
bundles
can be compared.
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What does Axiom 2: Transitivity state?
If A is
preferred
to B and B is preferred to C, then A is preferred to C.
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What does Axiom 3: Continuity imply?
Similar bundles have similar
rankings
.
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What does Axiom 4: Monotonicity state?
If A has more of both goods than B, then A is
strictly preferred
to B.
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What does Axiom 5: Convexity imply?
Averages
are preferred to
extremes
.
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What are the characteristics of 'well-behaved' preferences?
Similar bundles have
similar
ranks
More
is preferred to less
Averages
preferred to extremes
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What is total utility?
The number assigned to a
bundle
to summarize its rank.
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What is the implication of Axiom 1, 2 & 3 for indifference curves?
Indifference curves can be used to represent
preferences.
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What does Axiom 4 imply about the shape of indifference curves?
Indifference curves are
downward sloping
.
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What does Axiom 5 imply about the shape of indifference curves?
Indifference curves are bowed towards the
origin
.
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What does Axiom 2 imply about the relationship between indifference curves?
Indifference
curves
cannot
cross.
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What are the properties of indifference curves?
Indifference curves are made of bundles
They join bundles with the same
total utility
Cannot cross each other
Further from the
origin
, higher the utility
Usually negatively sloped
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What should you be able to do after this lecture?
State the five
axioms
of consumer theory
Rank bundles for individuals with
well-behaved preferences
Describe the implications of the axioms for indifference curves
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What is the implication of having 'bads' in consumer theory?
Increasing the quantity of 'bads' lowers
utility
.
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What is a bliss point in consumer theory?
A bundle with the maximum possible
utility
.
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What happens to utility when consumption exceeds the bliss point?
Utility
decreases
after a certain amount.
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What are the implications of the axioms for indifference curves?
Indifference curves can represent
preferences
They are downward sloping
They are convex to the
origin
They cannot
cross
each other
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