Homogeneity The homogeneity condition states that the sum of the own and cross
of demand price elasticities and income elasticities for a particular commodity = 0 .
function
Indifference
curve
Strong axiom if A is chosen over B and B over C, SARP and transitivity dictate that A is
of revealed also preferred to C, so A is indirectly revealed to be preferable to C
preference (A R* C). This drastically reduces the amount of empirical evidence
necessary to define consumer preferences.
Risk aversion the risk averter is one who prefers a given income with certainty to a
risky gamble with the same expected value of income. Risk aversion is
the most common attitude towards risk.
marginal utility of income of a risk-averter diminishes as his income
increases.
Compensating CV, or compensating variation, is the adjustment in income that returns
variation the consumer to the original utility after an economic change has
occurred.
In the case of a positive economic change (such as a fall in price of a
good), CV is often referred to as the maximum a consumer is willing to
pay in order to have the economic change happen. When there is a
negative economic change, CV is the minimum the consumer needs in
order to accept the economic change.
The compensating variation is bigger than the equivalent variation
because the price is lower with the original price – when the individual is
better off
Slutsky Using Slutsky equation, explain how a change in the interest rate affects
, current consumption
Slutsky equation: effect of a change in the price of a good on its own
demand
for the case of good x.
Graphically derive the HIcksian demand curve for a Giffen good
(MOODLE- SLUTSKY –HICKSIAN DEMAND)
Inferior good:
if
Giffen good:
Normal good:
Axiom of non- The concept of a Giffen good violates the axiom of non-satiation. T F.
satiation Preferences exhibit non-satiation: This is the "more is always better"
assumption; that in general if a consumer is offered two almost identical
bundles A and B, but where B includes more of one particular good, the
consumer will choose B.
Among other things this assumption precludes circular indifference
curves. Non-satiation in this sense is not a necessary but a convenient
assumption. It avoids unnecessary complications in the mathematical
models.
A Giffen good is a good for which demand increases as the price
increases, and falls when the price decreases. A Giffen good has an
upward-sloping demand curve
The assumption of non-satiation implies that the optimal bundle must
always lie on the budget constraint. T F. Explain.
It must lie on the frontier of the budget set, the budget constraint. This
results from the assumption of monotonicity.
We use the theoretical framework based on the assumption of
consistent, well-behaved preferences (including non-satiation and strict
convexity) to predict the optimal bundle that the consumer will choose.
Marginal What does a negative marginal utility imply about the nature of the
commodity in question?
As the rate of commodity acquisition increases, marginal utility
decreases. If commodity consumption continues to rise, marginal utility
at some point may fall to zero, reaching maximum total utility. Further
increase in consumption of units of commodities causes marginal utility
to become negative; this signifies dissatisfaction. Negative marginal
utility is when the consumption of an additional item decreases the total
of demand price elasticities and income elasticities for a particular commodity = 0 .
function
Indifference
curve
Strong axiom if A is chosen over B and B over C, SARP and transitivity dictate that A is
of revealed also preferred to C, so A is indirectly revealed to be preferable to C
preference (A R* C). This drastically reduces the amount of empirical evidence
necessary to define consumer preferences.
Risk aversion the risk averter is one who prefers a given income with certainty to a
risky gamble with the same expected value of income. Risk aversion is
the most common attitude towards risk.
marginal utility of income of a risk-averter diminishes as his income
increases.
Compensating CV, or compensating variation, is the adjustment in income that returns
variation the consumer to the original utility after an economic change has
occurred.
In the case of a positive economic change (such as a fall in price of a
good), CV is often referred to as the maximum a consumer is willing to
pay in order to have the economic change happen. When there is a
negative economic change, CV is the minimum the consumer needs in
order to accept the economic change.
The compensating variation is bigger than the equivalent variation
because the price is lower with the original price – when the individual is
better off
Slutsky Using Slutsky equation, explain how a change in the interest rate affects
, current consumption
Slutsky equation: effect of a change in the price of a good on its own
demand
for the case of good x.
Graphically derive the HIcksian demand curve for a Giffen good
(MOODLE- SLUTSKY –HICKSIAN DEMAND)
Inferior good:
if
Giffen good:
Normal good:
Axiom of non- The concept of a Giffen good violates the axiom of non-satiation. T F.
satiation Preferences exhibit non-satiation: This is the "more is always better"
assumption; that in general if a consumer is offered two almost identical
bundles A and B, but where B includes more of one particular good, the
consumer will choose B.
Among other things this assumption precludes circular indifference
curves. Non-satiation in this sense is not a necessary but a convenient
assumption. It avoids unnecessary complications in the mathematical
models.
A Giffen good is a good for which demand increases as the price
increases, and falls when the price decreases. A Giffen good has an
upward-sloping demand curve
The assumption of non-satiation implies that the optimal bundle must
always lie on the budget constraint. T F. Explain.
It must lie on the frontier of the budget set, the budget constraint. This
results from the assumption of monotonicity.
We use the theoretical framework based on the assumption of
consistent, well-behaved preferences (including non-satiation and strict
convexity) to predict the optimal bundle that the consumer will choose.
Marginal What does a negative marginal utility imply about the nature of the
commodity in question?
As the rate of commodity acquisition increases, marginal utility
decreases. If commodity consumption continues to rise, marginal utility
at some point may fall to zero, reaching maximum total utility. Further
increase in consumption of units of commodities causes marginal utility
to become negative; this signifies dissatisfaction. Negative marginal
utility is when the consumption of an additional item decreases the total
