Ch.

3 Preferences
Consumption bundles complete list of the goods and services that are involved in
the choice problem that we are investigating
Strictly preferred means consumer would choose one over the other, given the
opportunity
Indifferent the consumer would be just satisfied, according to their own
preferences, consuming one bundle as the other
Weakly preferred prefers or is indifferent between the two bundles.
Complete any two different bundles can be compared
Reflexive any bundle is at least as good as itself
Transitive if the consumer thinks that X is at least as good as Y and that Y is at
least as good as Z, then the consumer thinks that X is at least as good as Z.
Indifference curves graphic representation to describe preferences. Indifference
curves representing distinct levels of preference cannot cross
Weakly preferred set shaded area on a graph of an indifference curve consists of
all bundles that are at least as good as the bundle on the curve.
Perfect substitutes consumer is willing to substitute one food for the other at a
constant rate (slope on graph is -1, linear)
Perfect compliments goods that are always consumed together in fixed
proportions. (L-shaped indifference curve) doesnt have to be a 1-to-1 ratio of goods
Bad a commodity that the consumer doesnt like (positive slope)
Neutral good the consumer doesnt care about it one way or the other (vertical
line)
Satiation there is an overall best bundle for the consumer, and the closer he is to
that best bundle, the better off he is in terms of his own preferences. (indifference
curves surround a point)
Discrete good only available in integer amounts (indifference curves are points
on the graph of bundles that are at least as good as the indicated bundle)
Monotonicity more is better (negative slope)
Well-behaved indifference curves assume monotonicity and that averages are
preferred to extremes. Also assume that the set of bundles weakly preferred is a
convex set
Various kinds of preferences: convex (normal), nonconvex, and concave.

Strict convexity the weighted average of two indifferent bundles is strictly

preferred to the two extreme bundles.
Marginal rate of substitution (MRS) the slope of an indifference curve (marginal
willingness to pay)
Diminishing marginal rate of substitution (convex only) slope of indifference curve
decreases as we increase in good x.