Practice question · Multiple choice
The transitivity axiom says that preferring A to B and B to C forces preferring A to C. Why does violating it make a consumer exploitable?
Hints
- Suppose someone prefers A to B, B to C, and C to A. Offer them a small payment to swap each time.
- Where do they end up after three trades? What did the loop cost?
Show the answer
D. An intransitive consumer is a money pump
Why
Three trades return the bundle and remove the fee three times, and the loop can be repeated indefinitely, so intransitivity is not merely odd but self-destructive. The axioms describe consistency rather than good taste, which is why 'rational' in economics is a much weaker claim than it sounds.
Practise Consumer Preferences
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More questions on Consumer Preferences
- Match each preference axiom to its meaning.
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- The marginal rate of substitution typically diminishes as you move along an indifference curve to the right.
- Convex preferences mean averages are preferred to extremes, and the indifference curves bow inward. Why is…