Question 1

Two rationality assumptions economists make about tastes are first, that some individuals are not able to compare any two bundles of goods to one another, and second, that there is an internal consistency to tastes that makes it possible to choose a "best" bundle.

Accepted Answer

Economists do not assume that some individuals are not able to compare any two bundles of goods to one another. In fact, they assume that individuals are able to rank different bundles of goods in order of preference. However, economists do assume that individuals have consistent preferences that allow for the identification of a "best" bundle.

Question 2

You like bundle A better than bundle B, and bundle C is an average of bundles A and B.Which of the following is correct if your tastes satisfy our usual assumptions?
A)Bundle C is at least as good as bundle B.
B)Bundle A is at least as good as bundle C.
C)Both (a) and (b).
D)None of the above.
E)There is not enough information to tell.

Accepted Answer

Since you like bundle A better than bundle B, and bundle C is an average of bundles A and B, then bundle C must be closer in quality to bundle A than to bundle B. Therefore, bundle C is at least as good as bundle B.

Question 3

Economists define "rational" tastes as those which are objective and transitive.​

Accepted Answer

Economists define "rational" preferences (or tastes) as those which are complete and transitive, not objective and transitive. Completeness means that an individual can compare and rank all possible options, while transitivity means that their preferences are consistent across choices.

Question 4

Prove formally that the rationality axioms alone rule out the possibility of indifference curves crossing.

Accepted Answer

The answer of Prove formally that the rationality axioms alone...

Question 5

If you observe me choosing bundle A over bundle B on Monday, bundle B over bundle C on Tuesday and bundle C over bundle A on Wednesday, it must be that my tastes violate transitivity.

Accepted Answer

The answer of If you observe me choosing bundle A...

Question 6

Suppose tastes are NOT monotonic anywhere.Then diminishing MRS is not consistent with convexity of tastes.

Accepted Answer

If tastes are not monotonic anywhere, then there exists at least one point where the MRS is not diminishing. A convex preference relation implies that the MRS is diminishing at all points, so the two concepts are not consistent with each other.

Question 7

Suppose bundle A is better than bundle B for a consumer, and bundle C is an average of bundles A and B.
a.Use the continuity, convexity and monotonicity assumptions to formally prove that this implies that bundle C is better than bundle B.
b.Did you also -- implicitly or explicitly -- use the rationality axioms?

Accepted Answer

The answer of Suppose bundle A is better than bundle...

Question 8

Explain the following statement: Individuals with different tastes might have the same tastes at the margin at their current consumption bundles.

Accepted Answer

The answer of Explain the following statement: Individuals with different...

Question 9

Explain the following statement: For the same individual, tastes over goods may vary at the margin as we move from one bundle to another.

Accepted Answer

The answer of Explain the following statement: For the same...

Question 10

Complete tastes are tastes that make people desire at least some of every good.

Accepted Answer

Complete tastes refer to the situation where individuals do not have any preference among goods, and hence they do not desire at least some of every good.

Question 11

Consider a worker who dislikes working end enjoys consuming a composite good.With labor hours on the horizontal and the composite consumption good on the vertical axis, which of the following statements are true.
A)If the worker's tastes are convex, the slope of indifference curves increases as we move to the right in the graph.
B)The worker becomes better off as we move to the northwest in the graph.
C)A tax on wage income does not change this worker's indifference map.
D)All of the above.
E)None of the above.

Accepted Answer

If the worker's tastes are convex, the slope of indifference curves increases as we move to the right in the graph. As we move to the northwest in the graph, the worker consumes less of the composite good and works more hours, which makes the worker worse off. A tax on wage income reduces the worker's after-tax wage rate, which makes the worker worse off.

Question 12

Bundle A is worse than bundle B, and bundle C is an average of bundles A and B.Then our usual assumptions about tastes imply that bundle B is at least as good as bundle C.

Accepted Answer

The answer of Bundle A is worse than bundle B,...

Question 13

If the marginal rate of substitution is not diminishing, it must mean that tastes violate convexity (assuming that our other assumptions about tastes hold).

Accepted Answer

The law of diminishing marginal rate of substitution is a basic assumption in microeconomics, stating that as an individual consumes more and more of a good, the marginal utility derived from each additional unit of the good decreases, and the individual is willing to trade less and less of the other good to get it. If the marginal rate of substitution is not diminishing, it would violate this assumption and indicate that the individual's tastes are not consistent with the law of diminishing marginal utility, which implies convexity. Therefore, if the marginal rate of substitution is not diminishing, it must mean that tastes violate convexity.

Question 14

You like bundle A better than bundle B, and bundle C is an average between A and B.If your tastes satisfy convexity, then C is at least as good as A and as B.

Accepted Answer

Convexity implies that a consumer prefers mixtures or averages to extremes, but if a consumer already prefers A to B, then a mixture or average (C) would not necessarily be preferred to A, just potentially preferred over B or seen as an acceptable alternative. Convex preferences suggest a liking for diversification but do not guarantee that a mix is preferred over the most preferred option.

Question 15

Consider the utility function  .(Explain all your answers.) 
a.Derive the function for the marginal rate of substitution.
b.Do the tastes represented by this utility function satisfy diminishing MRS?
c.The marginal utility of a good is defined as the change in utility from additional consumption of that good (holding all else constant).Derive the marginal utility of  and  . 
d.Why does an ordinal approach to utility theory not any attention to what you derived in (c)?
e.Why does an ordinal approach to utility not treat the marginal rate of substitution the way it treats the marginal utility concept?

Accepted Answer

The answer of Consider the utility function  .(Explain all...

Question 16

The number of units of the good on the horizontal axis that we are willing to give up to get one more unit of the good on the vertical axis is equal to the absolute value of the slope of the indifference curve.

Accepted Answer

The answer of The number of units of the good...

Question 17

When the price of beer goes up, our model of tastes would typically require tastes to change.

Accepted Answer

The model of tastes assumes that preferences or tastes are stable and do not change when prices change. Instead, changes in consumption due to price changes are explained by movements along the demand curve, not by changes in tastes.

Quiz 4: Tastes and Indifference Curves