191T2 - ECON191 (Spring 2009) 16-17.2.2009 (Tutorial 2)...

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1 ECON191 (Spring 2009) 16-17.2.2009 (Tutorial 2) Chapter 2 Theory of Consumer (Chapter 3 Consumer Behavior) Consumption bundle, preferences and indifferences curves ± Consumption bundle, x represents a vector of goods, ( x 1 , x 2 , x 3 , x 4 , ……, x n ) ± Assumption of preferences : 1. Completeness: One will be able to tell y x f , or y x p 2. Transitivity (consistency): If y x f and z y f , then z x f 3. Monotonicity (non-satiation): If i i y x f for all i = 1, 2, 3, …, n and there exists at least one j such that j j y x > , then y x f 4. Continuity: Give a bundle x , if there exist a bundle x y f and x z p , then there also exists a bundle w between y and z such that w ~ x . Ö We will represent preferences by indifference curves. Note: " " f stands for “preferred to” (bundle) and “>” stands for “greater than” (quantity) Properties of indifference curve ± Indifference curve: shows combinations of goods among which a consumer is indifferent. 1. Indifference curves cannot intersect ± C B f (Monotonicity) ± A~C (On the same indifference curve) ± A B f (Transitivity) ± B~A (On the same indifference curve) Ö Contradiction 2. Indifference curves farther from the origin represent higher utility level ± As more is preferred to less, A B f Ö A~C as these two bundles are on the same IC Ö By transitivity, C B f 3. Indifference curves are convex ± Average is preferred to extreme Ö If it is not convex, then extreme is preferred to average. ± Diminishing MRS 4. Indifference curves are downward sloping More is preferred to less. B C X 2 A X 1 C A B X 2 X 1 IC 1 IC 2 C A B X 2 X 1
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2 Example : Lexicographical preference VS Continuous preference A person cares about two things only in the world: liberty and coke. She judged all countries first by how much liberty they afford their people and secondly by how much coke they have available to buy. If she were to compare life in two countries, then if one country offered its citizens more liberty than the other, she would prefer it no matter what the difference in coke consumption were. You cannot trade off liberty for coke. Only if two countries were equally free would the activist actually consider their coke consumption. Are the activist’s
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191T2 - ECON191 (Spring 2009) 16-17.2.2009 (Tutorial 2)...

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