Coursenotes_ECON301

That is on the surface this seems to justify

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Unformatted text preview: not a lemon. 330 These solutions are often referred to in the literature as signals (the literature on signalling is becoming quite vast in areas of concern from labour signalling models to signalling product types). PREFERENCE RELATIONS AND CHOICE RULES5 In this section, we will begin our exploration of the theory of individual decision making. Our approach will be to consider decision making behaviour in a completely abstract setting. As a point of origin for our discussion we begin by thinking about any individual decision problem as a set of possible (mutually exclusive) alternatives from which the consumer must choose. In the following analysis, we will denote the set of alternatives simply by X. For now, this set can be anything. For example, when an individual faces a decision of which career path to follow then the set of possible alternatives might include: {attend medical school, go to graduate school for economics, take over the family business, ... , become a taxi driver}. There are two separate approaches to modeling individual choice behaviour. The first method treats the decision maker's tastes (as summarized in their preference relation), as the primitive characteristic of the individual. The theory begins by developing rationality axioms on the decision maker's preferences and then analysing the effects of these preferences for their choice behaviour (i.e. looking at the results with respect to the choices made). This preference based approach is the more traditional of the two general approaches. The second approach treats the individual's choice behaviour as the primitive feature and goes forward with the aid of assumptions that help to define this behaviour. The assumption that is of paramount importance in this line of investigation is referred to as the Weak Axiom of Revealed Preference (WARP). This axiom of individual behaviour will define behavioural consistency on an individual's choices. This mirrors the idea from the traditional preference based approach that the consumer will behave rationally. The choice based approach offers up some very appealing pro...
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This note was uploaded on 05/25/2010 for the course ECON 301 taught by Professor Sning during the Spring '10 term at University of Warsaw.

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