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Unformatted text preview: Lecture 2 Preferences & Utility I Remember, the rational-actor paradigm is only a tool for analyzing behavior, not advice on how to live your life. Luke Froeb, Professor, Vanderbilt University The Economics Outline 1. Preferences 2. Utility Functions 3. Marginal Utility 4. Indifference Curves The Mathematics Outline 1. Preference Axioms 2. Monotonic Transformations 3. Derivatives Preferences In consumer theory we are going to be concerned with individual choices . We will be developing models of economic behavior that coincide with the choices individuals make. In order to do this we need to assume some semblance of rational behavior . Such rational behavior we will make rigorous through the following Preference Axioms . Three Necessary Preference Axioms 1. Completeness : For any set of goods being considered, a person can identify their preferences. Or, more rigorously, for any consumption bundles x and y, one of the following conditions holds: x f y ”x is preferred to y” y f x “y is preferred to x” x ~ y “indifferent between x and y” 2. Transitivity : If you like apples more than bananas and bananas more than peaches, then you have to like apples more than peaches. Or, more rigorously, for any consumption bundles x, y, and z, the following must be true: then y and z x z y x if f f f 3. Continuity : If x is in your consumption set, then y sufficiently close to x is also in your consumption set. Given these assumptions on preferences, it is possible to show that there exists a mathematical function that will represent preferences. Dr. Steven Waters Econ 380 Page 1 of 6 L2: Preferences & Utility I Two Convenient Preference Axioms 4. Nonsatiation : This axiom can be summed up in the words, “more is better.” For any y in the consumption set, there exists an x such that x > y implies that y x f ....
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This note was uploaded on 10/03/2011 for the course ECON 380 taught by Professor Showalter,m during the Fall '08 term at BYU.
- Fall '08