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FINAL notes - WARP-necessary condition4behavior to be...

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WARP -necessary condition4behavior to be consistent w/utility max. it's not a sufficient condition4behavior to be consistent w/ utility maximization SARP is a necessary and sufficient condition for utility maximization (optimizing behavior) Laspeyres index uses period b (base period) weights. If <1, consumers better off in base period. Paasche index uses period t (current period) weights. If >1, then period t must be better than period b . If <1, revealed preference says nothing. We can make welfare judements using these indices If Laspeyres Price Index < Expenditure index, then the consumer must be better off in year t than in year b . If < M, consumer worse off. indexing -adjust payment to keep purchasing power constant even when prices change social preference -aggregate the prefs of all agents into one (social ranking) Arrow’s Impossibility Theorem : The only voting rule with all of properties 1, 2 and 3 is dictatorial. Implication is that a nondictatorial voting rule requires giving up at least one of properties 1, 2 or 3. 1. If all individuals’ preferences are complete, reflexive and transitive, then so should be the social preference created by the voting rule. 2. If all individuals rank x before y then so should the voting rule. 3. Social preference between x and y should depend on individuals’ preferences between x and y only. public good -must be provided in the same amount to all the affected consumers. ex. war budget consumption externality -everyone must consume the same amount of the good voting -social choice mechanism for the provision of public goods net utility
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