M01 broo6651 1e sg c01

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
Chapter 3
Consumer Behavior
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Questions for Review
1. What are the four basic assumptions about individual preferences Explain the significance orb bmeaning of each.
(1) Preferences are complete this means that the consumer is able to compare and rank all possible baskets of goods and services. (2) Preferences are transitive this means that preferences are consistent, in the sense that if bundle A is preferred to bundle B and bundle B is preferred to bundle C, then bundle
A is preferred to bundle C. (3) More is preferred to less this means that all goods are desirable, and that the consumer always prefers to have more of each good. (4) Diminishing marginal rate of substitution this means that indifference curves are convex, and that the slope of the indifference curve increases (becomes less negative) as we move down along the curve. As a consumer moves down along her indifference curve she is willing to give up fewer units of the good on the vertical axis in exchange for one more unit of the good on the horizontal axis. This assumption also means that balanced market baskets are generally preferred to baskets that have a lot of one good and very little of the other good.