B Describe the Use of Indifference Curves, Opportunity Sets, Budget Constraints in Decision Making Flashcards Preview

L1 14 Demand and Supply Analysis: Consumer Demand > B Describe the Use of Indifference Curves, Opportunity Sets, Budget Constraints in Decision Making > Flashcards

Flashcards in B Describe the Use of Indifference Curves, Opportunity Sets, Budget Constraints in Decision Making Deck (3)
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1
Q

Indifference Curves (represents a consumers unique preferences over the two goods A and B)

A

Represents all combos of two goods such that the consumer is entirely indifferent among them.

Non-satiation: More is ALWAYS better: Ensures that all bundles lying directly above; directly to the right of; or both point A must be preferred to bundle A. Above and to the right: Preffered to bundle A set

Below and to the left: ‘dominated-by-bundle A’ set

A -Slope denotes that a decrease in one good leads to an increase in the other

Curvature reveals - (marginal rate of substitution) the strength of consumers willingness to trade off one good for the other - the indiff. curvature is convex from the origin indicating that the wilingness to give up A to obtain B diminishes the more B and the less A the bundle contains

MRS - the rate at which the consumer is willing to give up A to obtain a little B, holding utility constant - indicates a movement along the indifference curve.

Should convexity approach Y, the consumer is not willing to give up A for B and vice versa. Aka, the value being placed on B is diminishing as the slope of A/B becomes more positive

The MRSab is the negative of the slope of the tanger to the indifference curve at any given bundle. So, if slope indiff. = -n, that indicates consumer is willing to give up A to obtain B at a rate of [absolute value -n] parts A per parts B

Convexity assumption indicates that MRS diminishes as consumer moves toward more B and less A

2
Q

Indifference Curves in Decision Making

A

Indifference curve map: The consumers entire utility function

*completeness assumption, transitive assumption

Price increase on Y axis - constraint becomes ‘flatter’

Price increase on X axis - Constraint becomes ‘steeper’ as it approaches the origin

3
Q

Opportunity Sets (Consumption, Production, Investment)

A

Consumption: Budget constraint, -slope
Production: Budget constraint, -slope but concave as marginal opportunity cost increases as more A is produced resulting in fewer outputs for B
Investment: Can structure her investment opportunities as a frontier that shows the highest expected return consistent with any given level of risk…The investor’s choice of a portfolio on the frontier will depend on her level of risk aversion.