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l061004consumertheoryweb - S.Grant ECON501 1 CONSUMER...

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S.Grant ECON501 1. CONSUMER THEORY & DEMAND 1.1 Consumer Choice Theory Four building blocks 1. set of alternatives — Consumption Set X 2. a binary relation — Preferences % X × X , i.e. ( x, y ) % x % y represented by a utility function x % y u ( x ) u ( y ) 3. feasible set — Walrasian ( or Competitive) Budget Set B p,w X 4. a behaviorial assumption Preference (i.e. Utility) Maximization 1 S.Grant ECON501 1.1.1 Consumption Set (see MWG 2.C pp18-20) Finite number of commodities divisible or indivisible no time dimension, stocks rather than fl ows time (or location) can be built into de fi nition. uncertainty Commodity Space R L Consumption Set X R L 2
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S.Grant ECON501 1.1.2 Preferences (see MWG 3.B-C) Can derive from % two other relations: 1. Strict Preference x  y x % y and NOT ( y % x ) 2. Indifference x y x % y and y % x 3 S.Grant ECON501 Rationality Assumptions ( i ) completeness : for all x, y X either x % y or y % x (or both) ( ii ) transitivity : for all x, y, z X if x % y and y % z then x % z A preference relation that satis fi es completeness and transitivity is often referred to as a rational preference relation or a preference ordering.
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