ECON10A_2

# ECON10A_2 - PREFERENCES 1 WhatarePreferences We assume...

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1/4/2008 1 PREFERENCES

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1/4/2008 2  What are “Preferences”? We assume individuals’ have preferences. Preferences over what? Consumption bundles, not individual commodities Examples ( means “is preferred to”) 1 apple and 1 orange 2 apples 2 apples now 2 apples tomorrow Flows vs. stocks We will be concerned primarily with flows, e.g., “1 apple/wk”
1/4/2008 3 The Commodity Plane Graphical representation of 2 apples, 5 bananas Apples (X a ) Bananas (X b ) 2 5 (2, 5)

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1/4/2008 4 Multiple Commodities Two goods represented as: Ordered pair (X 1 ,X 2 ) in commodity plain Often sufficient for thinking about trade-offs, Cetereis paribus. .But sometimes we need more. What about 3 goods? Ordered triple (X 1 ,X 2 , X 3 ) in commodity 3-space What about n goods? Ordered n-tuple (X 1 ,X 2 , ,… X n ) in commodity n-space (X 1 ,X 2 , X 3 )
1/4/2008 5 AXIOMS Economists generally assume that preferences satisfy certain properties: Completeness: can rank any two alternatives Transitivity: If a b and b c then a c Continuity: a b means “almost a” b When all three hold, call it “rational” preferences. These don’t always hold. .. but we simplify by assuming they do.

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1/4/2008 6 Question 1 Mr. X would rather have 2 peanuts than 3 peanuts. Could this be “rational” of him? A. Yes B. No C. Can’t tell
1/4/2008 7 Question 2 Mr. Y would rather have a 1 peanut than 1 walnut. 1 walnut than 1 pecan 1 pecan than 1 peanut Are his preferences rational? A. Yes B. No C. Can’t tell

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1/4/2008 8 Question 3 Economist think people behave rationally. But people often make decisions based on emotions. Economists ignore this fact. A. True B. False
1/4/2008 9 Indifference Curves Definition: An indifference curve is a set of consumption bundles that an individual is indifferent among.

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1/4/2008 10 How to draw an indifference curve Apples (X a ) Bananas (X b ) 2 5 (2, 5) 6 8 3 6 1
1/4/2008 11 Multiple indifference curves

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1/4/2008 12 Indifference Curves and  Monotonicity Monotonic preferences imply “more” of any given good is always
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## This note was uploaded on 03/03/2011 for the course ECON 10a taught by Professor Babcock during the Winter '11 term at UCSB.

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ECON10A_2 - PREFERENCES 1 WhatarePreferences We assume...

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