3- Tastes

# 3- Tastes - T w o F undamental Rationality A ssumptions...

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8/16/11 Two Fundamental Rationality Assumptions about Tastes 1) Complete Tastes : Individuals can always make comparison between bundles. Given bundles A and B , either you prefer A to B or B to A , or you are If assumptions (1) and (2) hold, we say that the individual has “rational” tastes Rationality Axioms

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8/16/11 Three More Assumptions 1. Monotonicity – “ More Is Better, or at Least not Worse” Usually we will mean the following: If bundle A has more of all goods than bundle B , A is strictly preferred to B . If bundle A has more of some goods and no less of any goods than B , bundle A is at least as good as B . 2. Convexity – “Averages Are Better than Extremes, or at Least no Worse” Usually we will mean the following: If the consumer is indifferent between bundles A and B , any weighted average
Click to edit Master subtitle style 8/16/11 Ranking Consumption Bundles Can you rank any pair of these bundles using only the monotonicity assumption? Can you rank any of them if you also assume that tastes satisfy convexity ? Suppose you further know that this person is indifferent between A and B ? No N o Then we can conclude that C is at least as good as both A and B .

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8/16/11 Ranking Consumption Bundles What does monotonicity by itself now
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## This note was uploaded on 08/16/2011 for the course ECON 55 taught by Professor Rothstein during the Summer '07 term at Duke.

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3- Tastes - T w o F undamental Rationality A ssumptions...

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