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Utility theory : Assumption

consumer knows his taste & preferences & takes rational actions that result in a more preffered consumption bundle

Consumer basket

all the possible goods and services are in one basket

Consumer bundle

all the same goods but in different quantities in a bundle

Assumtion of copletens

given bundles A and B, she must be able to say either that she prefers A to B, or she prefers B to A, or she is indifferent between the two. 

Assumption of Transitivity

comparing any three distinct bundles, A, B, and C, if A is preferred to B, and simultaneously B is preferred to C, then it must be true that A is preferred to C.

Assumption of nonsatiation

"more is better" = consumer could never have so much of at least 1 good, that he would refuse it, even if it were free

Utility function

measures welfare or satisfaction of a consumer as a function of consumption of real goods, such as food, clothing and composite goods rather than nominal goods measured in nominal terms. Utility function is widely used in the rational choice theory to analyze human behavior.

Indifference curve

Represents all the combinations of goods such that the consumer is indifferent about them.