104A_Preferences

104A_Preferences - Preference Theory. Consumption...

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Unformatted text preview: Preference Theory. Consumption quantities : X i = quantity consumed per time pe- riod of commodity i , i = 1 , . . . , n . Assumption 1 (perfect divisibility): X i can be any nonnegative (real) number for all i . Consumption bundle : X = [ X 1 , . . . , X n ]. Assumption 2 (Completeness of preferences): For any pair of bundles, ¯ X and ˆ X , the consumer prefers ¯ X to ˆ X or prefers ˆ X to ¯ X or is indi ff erent between the two. Assumption 3 (transitivity of preferences): (a) ¯ X preferred to ˆ X and ˆ X preferred to X implies that ¯ X preferred to X . (b) ¯ X indi ff erent to ˆ X and ˆ X indi ff erent to X implies that ¯ X indi ff erent to X . • Assumptions 2 and 3 imply a complete (preference) ordering of consumption bun- dles. • Assumptions 1–3 imply the existence of an indi ff erence map . Every consumption bundle lies on one and only one indi ff er- ence surface (indi ff erence curve in two di- mensions). Assumption 4 (fixed income and prices): The consumer is endowed with fixed nonneg-...
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This note was uploaded on 10/05/2010 for the course ECON 104A taught by Professor Thomas during the Spring '10 term at UC Riverside.

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104A_Preferences - Preference Theory. Consumption...

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