Understanding Consumer Preferences and Indifference Curves
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ScribdTranslationsUnderstanding Consumer Preferences and Indifference Curves
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ScribdTranslations1. What are the four basic assumptions about individual preferences?
Explain the
importance or the meaning of each one.
Completeness:
People can decide from all the possible alternatives between A and B. It may
determine whether you prefer A to B, B to A or are indifferent between A and B.
The more, the better:
This property means that, when keeping everything else constant, a greater one is preferred.
amount of a good to a lesser. Whatever the quantities at hand, consuming never does
satisfaction. This property is called insatiability.
Transitivity
It is a property of coherence since, if the individual prefers basket 1 to basket 2, and prefers the
basket 2 to basket 3, then also prefers 1 to 3.
Convexity
The combinations of goods are preferable to the extremes. This property gives the feeling that
We like that our combination of goods is balanced.
2. Can a set of indifference curves have a positive slope? If so,
What would that say about the two goods?
If it is possible. In the case that one of the two goods is a 'bad', the indifference curves
they would have a positive slope. This would indicate that there is a good, the 'bad', that the consumer does not
Like and if we give more quantity of this good, we will have to give more quantity of the other good to
maintain its level of usefulness.
3. Explain why two indifference curves cannot intersect.
Indifference curves do not intersect, because if they did intersect, there would be a point of intersection at which
both curves would have the same level of satisfaction, but since within each curve all of their
puntos tienen el mismo nivel de satisfacción, esto implicaría que todos los puntos de las dos curvas
they would have the same level of satisfaction.
This would not make sense since on one side of the crossing point one of the curves would be farther away from the
origen (por lo que debería tener un nivel de satisfacción mayor) mientras que al otro lado del punto
The crossing would be situated closer to the origin, that is to say, a lower level of satisfaction.
4. Juan is always willing to exchange a can of Coca Cola for a Sprite or a
Sprite for a Coca-Cola.
a) What can you say about Juan's marginal rate of substitution?
These two goods are substitutes for Juan, as it is completely indifferent for him to entertain a glass of
one and a glass of the other. In this case, the RMS of Coca Cola to Sprite is 1: Juan is always
willing to exchange 1 can of Coca-Cola for one of Sprite, therefore, their marginal relationship of
substitution is a constant, because they are substitute goods.
b) Draw a set of indifference curves for Juan.
c) Draw two budget lines with different slopes and illustrate the choice
maximizer of satisfaction. What conclusion can be drawn?
What happens to the marginal rate of substitution when we move along a
curva de indiferencia convexa? ¿y de una curva de indiferencia lineal?
The marginal rate of substitution (MRS) is the slope of a point on the curve of the curve of
indifference. The RMS measures the rate at which the consumer is willing to exchange, or
substitute the consumption of one good for another.
As we move to the right, the RMS of x by y decreases. This property is
known as the decreasing marginal rate of substitution.
6. Explain why the RMS of a person between two goods must be equal to the ratio of the
prices of goods so that person achieves maximum satisfaction.
Consumers always seek to maximize their satisfaction subject to constraints.
budgetary. When it maximizes this satisfaction by consuming some of each of the goods, the
RMS is equal to the ratio of the prices that are purchased. Profit is maximized when the rent is
distribute in such a way that the marginal utility of each good (speaking of currency) is identical.
That is, when the RMS is balanced and this basket contains the largest amount of goods it is equal
to maximum satisfaction.
7. Describe the indifference curves corresponding to two goods that are substitutes.
perfect complements What happens if they are perfect complements?
The indifference curves of two goods that are perfect substitutes would be straight lines with
pendants given by a constant. It is possible to move to a higher utility curve by increasing the
amount of either of the two goods. If they are perfect complementary goods, the curve would have
L-shaped. That is to say, it will only be possible to move up to a higher level if the quantity increases.
the consumed goods.
8. What is the difference between ordinal utility and cardinal utility? Explain why it is not necessary.
the assumption of cardinal utility to order consumer choices.
An ordinal utility is one that reflects an order of market baskets in descending order, while
that the cardinal describes how much one basket is preferred over another.
It is not possible to use the cardinal utility to determine if a shopping cart reports to a person the
double the satisfaction of another, nor do we know if the consumption of one basket reports double the
satisfaction of another, what is important is to understand 'consumer behavior', to know how
arrange these different baskets, which helps to understand how the consumer makes their decisions
decisions and thus understand the implications for the characteristics of the demand for the
consumers.
9. After the merger with the economy of West Germany, consumers in Germany
Orientals showed a preference for Mercedes-Benz cars over
Volkswagen. However, when they converted their savings into German marks, they turned to
a los concesionarios de Volkswagen. ¿Cómo puede explicar esta aparente paradoja?
Consumers noticed that converting their savings into German marks was more expensive.
buy the Mercedes-Benz that came with many more things or newer models and was a brand
exclusive that the Volkswagen, because this car was more comfortable, comfortable and accessible to its
pockets.
10. Draw a budget line and then an indifference curve to illustrate the
maximizing choice of satisfaction corresponding to two products. Use your
graph to answer the following questions:
a) Suppose that one of the products is rationed. Explain why it is likely to worsen.
the well-being of the consumer.
The value of the product would increase due to its scarcity, and therefore you would have to consider whether you want to
pay more for the same product or if on the contrary find a substitute product that can
satisfy a need or taste at a certain level.
His well-being would worsen as he would have to set aside that product or alternatively pay more for it.
him and deprive others.
b) Suppose that the price of one of the products is set at a level lower than the price
current. As a consequence, the consumer cannot buy as much as they would like. Can you say
Does the well-being of the consumer improve or worsen?
The consumer's well-being worsens, as they will have to stop buying what they long for or desire, even
when the price is low.