Week2 Handout - 7/27/2010 Preferences and Utility Chapter...

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7/27/2010 1 Preferences and Utility Chapter 3: preferences Chapter 4: utility 2 Preferences We want to find patterns/regularities in the behaviour of decision-makers. This requires that there is some regularity or predictability in their behaviour. For consumers, this regularity follows from the following postulate: Each consumer has well-defined preferences, and chooses the most- preferred consumption bundle out of all the available ones. 3 Theory vs. tautology This postulate is without content, i.e. it is a tautology, (what does that mean?) as it stands. In order to make it meaningful, we must add content that leads to falsifiable predictions . We do so by making further assumptions about the structure of preferences, which imply that the resulting behaviour pattern must have certain properties.
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7/27/2010 2 4 Preferences between bundles “preference” is a binary relation between bundles, i.e., it is a relation between two bundles. We require the consumer to only be able to answer the following question for a bundle x relative to a bundle y : “Do you prefer x at least as much as y ?” By asking this question for various combinations, we can derive various relations between bundles. 5 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. 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. Note that weak preference does not exclude either strict preference or indifference y x means the same as x y, y x means the same as x y.
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7/27/2010 3 7 Preference Relations x y and y x imply x y. x y and (not y x) imply x y. Of course, strict preference and weak preferences are both preference relations, and we could use either one or the other. 8 Basic assumptions on preferences Completeness: The consumer can compare any two bundles x and y, i.e. s/he can answer “yes” or “no” to the question: “Do you prefer x at least as much as y?” (She can’t say “I don’t know.”) i.e., for any two bundles x and y, either x y or y x or both. Note that different consumers may give different answers when asked to compare the same two bundles. 9
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This note was uploaded on 06/12/2011 for the course ECONOMICS 3291 taught by Professor Professorsnamespublishedtheyarethesoleowners during the Three '11 term at University of New South Wales.

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Week2 Handout - 7/27/2010 Preferences and Utility Chapter...

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