Aniko Oery
University of California, Berkeley
Section 3: Consumer preferences and utility functions
Econ 100A, MICRO-ECONOMIC ANALYSIS, Spring 2010
Last time we have discussed how equilibria arise in markets given demand and supply functions.
Our next goal is to understand how the demand side of the market works. Therefore, we will
start with the analysis of preferences of consumers. Given certain assumptions, preferences can
be represented by a utility function. Next time, we will examine the behavior of consumers under
risk and next week we will incorporate the budget constraint that a consumer faces.
1
Preferences
For simplicity we assume that the decision maker only cares about two types of goods x and y.
E.g., you can think of good x being some good we are interested in and good y being the value
of the sum of all other goods. Preferences are then deﬁned on the set of baskets (
Q
x
, Q
y
), where
Q
x
, Q
y
are real numbers representing the quantity of good
x
and
y
, respectively. We write
(3
,
7)
±
(8
,
1)
if the decision maker prefers the basket (3
,
7) to (8
,
1), i.e. he likes 3 units of good
x
and 7 units
of good
y
more than 8 units of good
x
and 1 unit of good
y
. We often denote such bundles or
baskets by capital letters A,B,C, i.e. for example
A
= (3
,
7),
B
= (8
,
1) and
A
±
B
. Moreover,
you know from lecture that preferences must satisfy Completeness, Transitivity and Monotonicity
(more is better). We can plot these bundles in the (