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review_ch3

# review_ch3 - Chapter 3 Review Preferences People choose the...

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Chapter 3 Review: Preferences People choose the best things they can afford. 3.1 Consumer preferences ( x 1 , x 2 ) ´ ( y 1 , y 2 ) means the x-bundle is strictly preferred to the y-bundle. ( x 1 , x 2) ( y 1 , y 2 ) means that the x-bundle is regarded as indifferent to the y-bundle. ( x 1 , x 2) ( y 1 , y 2 ) means the x-bundle is at least as good as (preferred to or indifferent to) the y-bundle. 3.2 Assumptions about preferences 1. Complete: Any two bundles can be compared. ( x 1 , x 2 ) ( y 1 , y 2 ) or ( y 1 , y 2 ) ( x 1 , x 2 ), or both. 2. Reflexive: Any bundle is at least as good as itself, i.e. ( x 1 , x 2 ) ( x 1 , x 2 ). 3. Transitive: If ( x 1 , x 2 ) ( y 1 , y 2 ) and ( y 1 , y 2 ) ( z 1 , z 2 ), then ( x 1 , x 2 ) ( z 1 , z 2 ). 1 1 Transitivity is necessary for the theory of optimal choice. 1

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2 CHAPTER 3. REVIEW: PREFERENCES 3.3 Indifference curve Indifference curves are a way to describe preferences. Say, you pick a certain consumption bundle ( x 1 , x 2 ) as in the figure below, then the shaded area are all consumption bundles that are weakly preferred to ( x 1 , x 2 ), which
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review_ch3 - Chapter 3 Review Preferences People choose the...

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