Ch3 - Chapter Three Preferences Rationality in Economics...

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Chapter Three Preferences
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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.
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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.
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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.
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Preference Relations denotes strict preference; x y means that bundle x is preferred strictly to bundle y.
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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.
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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. ~ ~
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Preference Relations x y and y x imply x y. ~ ~
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Preference Relations x y and y x imply x y. x y and (not y x) imply x y. ~ ~ ~ ~
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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. ~ ~
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Assumptions about Preference Relations Reflexivity : Any bundle x is always at least as preferred as itself; i.e. x x. ~
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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. x y and y z x z. ~ ~ ~
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Indifference Curves Take a reference bundle x’. The set of all bundles equally preferred to x’ is the indifference curve containing x’ ; the set of all bundles y x’. Since an indifference “curve” is not always a curve a better name might be an indifference “set”.
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Indifference Curves x x 2 x x 1 x” x” x”’ x”’ x’ x’ x” x” x”’ x”’ x’
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Indifference Curves x x 2 x x 1 z z x x y y x y z
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x
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Ch3 - Chapter Three Preferences Rationality in Economics...

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