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Microeconomics Question from Walter E. Williams:Edit

"What are the four essential property of indifference curves between two goods? Explain the justification for each property."

Answers:Edit

In class notes, Williams actually listed five (5) "axioms of indifference analysis":

  • (1) For all A or B (goods) in some opportunity set, either A is preferred to B, B is preferred to A, or both (indifferent)
  • (2) Transitivity - if A is preferred to B and B is preferred to C, then A must be preferred to C
  • (3) Rational Choice - if consumer selects A, we assume the selection represents his preference
  • (4) Any set having more of one good and no less of any others is preferred (to the one with one less good)
  • (5) Indifference curves are convex to the origin

As an alternative, the text Price Theory and Applications (Hirschleifer and Glazer, 5th ed, pp. 66-67) lists "four crucial properties" of indifference curves:

  • (1) Negative slope - corresponds to Williams' point number 4 above
  • (2) Indifference curves cannot intersect - relates to Williams' point number 2 above
  • (3) Coverage of indifference curves - every point in the commodity space is covered, meaning that any basket of goods must lie on some indifference curve
  • (4) Indifference curves are convex to the origin - same as Williams' point number 5 above, and H&G's justification is that, while this can not be proved from the postulates of rational choice, "it is based on the well-established empirical principle of diversity in consumption"

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