Coursenotes_ECON301

S the ual vity ty if this were the case then t

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Unformatted text preview: d lfa, Buck kwheat. Fu urther suppo that the gentlem are tryi to decid upon a ose ese men ing de Frida night act ay tivity. The c choices are going to see a movie (M), going to the Pub e e g b (P), o going to Dana Porte Library to study ECON 301 (L) or er o ). Kahneman and Tversky (1984 T 4) Kahneman and Tversky attribu this to individuals keep T ute ping "mental a accounts" in w which the saving are compa gs ared to the pri of the item on which they are receiv ice m ved. 8 7 336 It is a agreed that the household is to o t operate by m majority vot Now, th te. he prefe erences of these three "Little Ras t e scals" are as follows: Alfalf fa Buck kwheat Span nky M L P P M L P M L Ther is no problem with these individ re dual prefere ences, they are transit y tive and comp plete (ration nal). But in the contex of a majo n xt ority vote...a they? are pose that we take a pa wise vote between M and L... w air e Supp Alfalf and Spanky both pr fa refer M to L while Buckwheat pre efers L to M. Majority vote will be M and they wo a ould go to th movies. he M L Supp pose that we take a pa wise vote between L and P... w air e Alfalf and Buckwheat both prefer L t P while S fa to Spanky pref fers P to L. Majority vote will be L an they wou go to th library. nd uld he L P Supp pose that we take a pa wise vote between P and M... w air e Span and Buckwheat bo prefer P to M while Alfalfa pre nky oth e efers M to P Majority P. vote will be P and they would go to th pub. he P M given these pair wise v e votes the group decision preferen nces are as follows: s So, g M L P M and t househ the hold prefere ences have taken on a intransitiv form. Th an ve he intran nsitivity illus strated in th example is known as the Con his e ndorcet para adox and it t is the central pr e roblem for the theory o group decision making. of 337 OM RENCE RE ELATIONS TO UTILIT FUNCTIO TY ONS FRO PREFER In ec conomics, we like to us utility fun w se nctions to e express pre eference relations. A utility function u(x) ass...
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