Lect03__Preferences

# Lect03__Preferences - Preferences We assume that consumers...

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13 Preferences We assume that consumers can provide a rank ordering of any two consumption bundles (preferences are complete). This means that households can rank order consumption options that are currently not affordable. We assume that more is preferred to less (a bundle with more of everything is preferred to the original bundle) and that rank orderings are transitive. In other words, if A is better than B and B is better than C then A is better than C. Given a consumption bundle, A, the consumer can divide the space of consumption bundles into three regions: consumption bundles that are ranked the same as A, those ranked higher than A, and those ranked lower than A. The set of consumption bundles ranked the same as A represents an indifference curve. A is same as B. C is preferred to A. A is preferred to D. A B C D Indifference Curve X 1 X 2

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14 There are an infinite number of indifference curves. Each bundle lies on exactly one indifference curve. 2 indifference curves can't intersect. Indifference curves have a negative slope. Indifference curves can't have a positive slope. B has more of everything than A so B should be preferred to A, therefore B and A can't be on the same indifference curve. X 1 X 2 A B A C B A and C on same indifference curve. A and B on same indifference curve. Therefore B and C should have same ranking by transitivity. Contradiction because C is preferred to B (more is preferred to less). X 1 X 2
15 A consumer's preferences are completely represented by an indifference curve map or set of indifference curves. This indifference curve map is like a topographic map. Each point or consumption bundle along the curve U 1 has the same "elevation". The goal of the consumer is to reach the highest possible level of

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Lect03__Preferences - Preferences We assume that consumers...

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