Microeconomic Theory Homework Guidance: Consumer Preferences & Indifference Curves

Q1. Suppose the assumption of 'more is better' is satisfied. If indifference curves cross, then:

Background

Topic: Consumer Preferences and Indifference Curves

This question tests your understanding of the basic assumptions underlying consumer theory, specifically the properties of indifference curves and what happens if they cross.

Key Terms and Concepts:

• Indifference Curve: A curve representing all combinations of goods that provide the consumer with the same level of satisfaction.

• Transitivity: If a consumer prefers A to B and B to C, then they must prefer A to C.

• 'More is better' Assumption: Consumers always prefer more of a good to less, holding everything else constant.

Step-by-Step Guidance

1. Recall that indifference curves should never cross if the assumptions of consumer theory are satisfied. Crossing curves would imply inconsistent preferences.

2. Think about what crossing indifference curves means: it would suggest that two different combinations of goods are both equally preferred and one is strictly better than the other, which violates the 'more is better' and transitivity assumptions.

3. Consider the implications for transitivity: If indifference curves cross, a consumer could be indifferent between two baskets, but also prefer one over the other, which is logically inconsistent.

4. Review the graphical representation of indifference curves and how the 'more is better' assumption ensures that curves do not cross.

Try solving on your own before revealing the answer!

Final Answer: If indifference curves cross, then either the assumption of transitivity is violated or the assumption of 'more is better' is violated.

Indifference curves crossing would contradict the logical consistency required by these assumptions.