Consumer_Theory_1_S08

Consumer_Theory_1_S08 - Preferences and Utility Chapter 3...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Preferences and Utility Chapter 3 Representation of Individual Preferences Ordinal Ranking of alternatives from best to worst • Characterization of Utility Function Cardinal Ranking , assigning numbers to alternatives – Higher numbers for better alternatives • Graphical Representation: Indifference Curves Marginal Rate of Substitution – Individual tradeoff between consuming one good vs. another
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Preference Relations (1) • Suppose consumer has to choose between different alternatives: w, x, y, z… • Examples: Alternatives may be sports teams, favorite cities, favorite movies etc. Consumer Choice: Alternatives may be “Consumption bundles”, i.e. quantities of different commodities that are consumed (Food, Housing, Education, Travel, Books etc.) • Where x n denotes the quantity of the n-th commodity. ( ) N x x x x ,..., , 2 1 =
Background image of page 2
Preference Relations (2) Axioms of Rational Choice 1. Completeness: For any alternatives y and z: either y is at least as good as z, or z is at least as good as y, or both (y and z are equally attractive). Any pair of alternatives can be compared 2. Transitivity: For any alternatives x, y, and z, if x is at least as good as y and y is at least as good as z, then x is at least as good as z. Internal consistency of comparisons Completeness and Transitivity together imply that there exists an Ordinal Ranking of alternatives from best to worst.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Preference Relations (3) 3. Continuity Axiom: If y is strictly better than z, then alternatives “near y” are also strictly better than z. Completeness, Transitivity and Continuity imply that there exists a cardinal ranking: we can assign numbers to each alternative (higher numbers for better alternatives). For consumption bundles: call cardinal ranking utility function U(x) Example of a preference ordering that satisfies completeness and transitivity, but not continuity: Lexicographic Preferences •( x 1 ,y 1 ) is preferred to (x 2 ,y 2 ), if x 1 > x 2 , or x 1 = x 2 and y 1 > y 2 Like the ordering of names in Phonebook
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 22

Consumer_Theory_1_S08 - Preferences and Utility Chapter 3...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online