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Figure above shows different bundles of goods. Indifference curves are defined in a framework set by axioms. As follows:
- Completeness : this axiom means that everything can be ranked. For every pair of bundles, the consumer either prefers the first to the second, is indifferent, or prefers second to the first. And there is no other possibility.
- Transitivity: this axiom means the preferences don’t cycle. That is, if a consumer prefers a bundle A to B and bundle B to C (A > B > C) then the consumer must prefer A to C.
- Monotonicity: this axiom implies more is always preferred to less. Consumers will always find more utility with a higher amount of a good. It implies that U(x+1) > U(x). For example, I will be have more utility with five cookies than with four cookies, always.
- Convexity: this axiom means that a bundle of averages is preferred to a bundle of extremes. This means that I will prefer a bundle that is a combination of two extreme bundles. Since that bundle is an average of two extreme bundles.
Different types of consumer preferences
The first indifference curve represents imperfect substitutes, which is a standard Cobb Douglas functional form. The second preferences are straight line preferences. These indifference curves are not convex. Lastly, we have perfect complements represented by L-shaped indifference curves.
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