Intermediate Microeconomics: When Pricier Rice Means Buying More
Preferences, income and substitution effects, risk, cost duality, general equilibrium, welfare theorems, game theory, oligopoly and hidden information, through their sharpest insights.
Try 3 questions
1. Someone prefers A to B, B to C, yet C to A. How could a clever trader exploit these intransitive preferences?
- Nothing, since their choices are random
- Sell them only option A forever
- Charge them to trade in endless circles
Show the answer
Answer: Charge them to trade in endless circles
They would pay a little to swap C for B, B for A, then A for C, and so on; this 'money pump' is why economists assume transitivity.
2. Left and right shoes are perfect complements. If right shoes become pricier, what does a shoe-wearer do?
- Buys the same number of pairs
- Buys fewer complete pairs
- Buys more left shoes instead
Show the answer
Answer: Buys fewer complete pairs
With perfect complements, only complete pairs give utility, so a price rise on either part simply raises the cost of each pair.
3. Two brands of bottled water are perfect substitutes for a consumer. What does she buy?
- Equal amounts of both brands
- Mostly the pricier one
- Only the cheaper one
Show the answer
Answer: Only the cheaper one
With straight-line indifference curves, she gets the same satisfaction either way, so she spends everything on whichever is cheaper.
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