Coursenotes_ECON301

Example x x for e y m means that x is at leas as good

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Unformatted text preview: ; ion these two a assumption are comp ns pleteness a transitiv and vity. RAT TIONAL PR REFERENCES Our p preference relation and t transitive. is rational if it has the proper rties of bein complete ng e y and y x (2) 332 Com mpleteness: for all x,y X, we ha that x ave Transitivity: for all x,y,z X, if x r y and y y or y x (or both). z then x z. Our a assumption that n is complete has a po owerful implication. Th is, if the hat e prefe erence relat tion is complete then t individu has a cle the ual early define ed prefe erence betw ween ANY t two possibl alternativ le ves. Let's pause to consider wh this assumption me s c hat eans in pra actical terms This s. mean that the consumer has taken t time and effort to r ns the reflect on ev very poss sible combin nation of ch hoices they could compare and decided betw ween them in so ome comple ordered way (i.e. in terms of in ete n ndifference or preference). The e comp pleteness assumption allows us t move for a to rward with t assuran that this the nce s arduous task ha been performed by the individual decision maker. as n assumption that preferences are transitive is also a po n owerful assu umption and d Our a it ens sures the concept of ra ationality. T transiti The ivity proper suggests that it is rty s not p possible for the individual to make a series o pairwise choices tha result in a r e of at circu flow of preference. For exam ular p . mple, transit tivity implies that a con s nsumer cann report th they believe that dr not hat riving is at l least as good as taking the bus and t that taking the bus is a least as g at good as rid ding a horse but then a e also prefe erring riding a horse to driving. g o The t transitivity property an the comp nd pleteness p property can be difficult to satisfy n when the decisi maker is facing choices that a well rem n ion are moved from their m comm experiences. But, compared to the com mon d mpleteness property, t s the trans sitivity prope is more fundamen in the s erty e ntal sense that m much of the economic e c theor we learn would not survive...
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