Review-IndifferenceCurve

# Review-IndifferenceCurve - Chapter Three Preferences...

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Chapter Three Preferences

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Rationality in Economics ± Behavioral Postulate : A decisionmaker always chooses its most preferred alternative from its set of available alternatives. ± So to model choice we must model decisionmakers’ preferences.
Preference Relations ± Comparing two different consumption bundles, x and y: strict preference : x is more preferred than is y. weak preference : x is as at least as preferred as is y. indifference : x is exactly as preferred as is y.

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Preference Relations ± Strict preference, weak preference and indifference are all preference relations. ± Particularly, they are ordinal relations; i.e. they state only the order in which bundles are preferred.
Preference Relations ± denotes strict preference; x y means that bundle x is preferred strictly to bundle y. p p

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Preference Relations ± denotes strict preference; x y means bundle x is preferred strictly to bundle y. ± denotes indifference; x y means x and y are equally preferred. p p
Preference Relations ± denotes strict preference so x y means that bundle x is preferred strictly to bundle y. ± denotes indifference; x y means x and y are equally preferred. ± denotes weak preference; x y means x is preferred at least as much as is y. ~ f ~ f p p

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Preference Relations ± x y and y x imply x y. ~ f ~ f
Preference Relations ± x y and y x imply x y. ± x y and (not y x) imply x y. ~ f ~ f ~ f ~ f p

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Assumptions about Preference Relations ± Completeness : For any two bundles x and y it is always possible to make the statement that either x y or y x. ~ f ~ f
Assumptions about Preference Relations ± Reflexivity : Any bundle x is always at least as preferred as itself; i.e. x x. ~ f

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Assumptions about Preference Relations ± Transitivity : If x is at least as preferred as y, and y is at least as preferred as z, then x is at least as preferred as z; i.e. x y and y z x z. ~ f ~ f ~ f
Indifference Curves ± Take a reference bundle x’. The set of all bundles equally preferred to x’ is the indifference curve containing x’ ; the set of all bundles y x’. ± Since an indifference “curve” is not always a curve a better name might be an indifference “set”.

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Indifference Curves x x 2 x” x” x”’ x”’ x’ x’ x” x” x”’ x”’ x’ x x 1
Indifference Curves x x 2 z z x x y y p p x y z x x 1

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Indifference Curves x 2 x 1 x All bundles in I 1 are strictly preferred to all in I 2 .
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Review-IndifferenceCurve - Chapter Three Preferences...

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