Consider a consumer maximizing his preferences over a budget set (which is defined by a weak...

Consider a consumer maximizing his preferences over a budget set (which is defined by a weak inequality involving prices and income). Which of the following assumptions on preferences guarantees that a bundle lying in the interior of the budget set is not a maximizer?

(A) Transitivity (B) Convexity (C) Continuity (D) Monotonicity (E) Homotheticity

Solutions

Expert Solution

The correct option is d.

a) Assumption of transitivity is when bundle A is preferred to bundle b and bundle b is preferred to bundle c, then bundle a would be preferred to bundle c also. This doesn't prove that bundle not lying on budget set is not a maximiser.

b) Assumption of convexity is that average combinations are preferred to extreme combinations. But all these combinations are on same line. No combination is on the interior side.

c) Assumption of continuity is that there is no sudden jump in the ranking of alternatives by the consumers. This doesn't speak about bundle set not being maximiser if it lies on the inner side.

d) Assumption of monotonicity is that more is preferred to less by the consumers. So the bundle which is less and is lying on the inner side of the budget set will not be preferred and the bundle having more and lying on the budget set will be preferred by the consumers. This will also lead to maximization by offering more compared to the bundle which has less.

Rahul Sunny answered 1 year ago

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