03s - 2011/2/27 1 3 Preferences 2 Rationality in Economics...

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Unformatted text preview: 2011/2/27 1 3 Preferences 2 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. 3 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. 4 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. 2011/2/27 2 5 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 6 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 7 Preference Relations  x y and y x imply x  y.  x y and (not y x) imply x y. ~ f ~ f ~ f ~ f p 8 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 2011/2/27 3 9 Assumptions about Preference Relations  Reflexivity: Any bundle x is always at least as preferred as itself; i.e. x x. ~ f 10 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....
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This note was uploaded on 06/12/2011 for the course ECON 101 taught by Professor Dee during the Spring '10 term at Andhra University.

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03s - 2011/2/27 1 3 Preferences 2 Rationality in Economics...

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