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Handout on Consumer Theory

Handout on Consumer Theory - Theory of Consumer Behavior...

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Theory of Consumer Behavior Economics 201 G. Jehle I. Overview: There are three independent components to the theory of consumer choice: Preferences, Constraints, Objectives. Each can be characterized separately in a manner appropriate to the question at hand. I.A. Preferences: Preferences describe the agent’s innate ability to make choices, the logical consistency of those choices, and the agent’s “tastes” for the objects of choice. I.A.a. Axiomatic Structure: Preferences are structured axiomatically . Each axiom formalizes an assumption about the agent’s binary (pair-wise) comparisons be- tween objects of choice. We let ( P ) “ is strictly preferred to ”, ( I ) “is indifferent to”; A ( x 0 , y 0 ), B ( x 1 , y 1 ), and C ( x 2 , y 2 ). 1. Axiom of Completeness: For any two bundles A and B : either A ( P ) B or B ( P ) A or A ( I ) B. 2. Axiom of Transitivity: For any three bundles A , B , and C : if A ( P ) B and B ( P ) C, then A ( P ) C, if A ( I ) B and B ( I ) C, then A ( I ) C.
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