Unformatted text preview: odel consumer choice, we need to identify which bundles are physically available for consumption (the
“consumption set” discussed above), which bundles are affordable (the “budget set”, discussed below), and the
consumers “preferences” over all bundles in the consumption set. In economics, “preferences” refers to the idea that
consumers can rank goods (or bundles of goods) in terms of whether a bundle is “better than” or “indifferent to”
another bundle. Be careful: telling us your preferences is about being able to rank bundles and not about quantifying
“satisfaction” or “utility”.
We will assume that consumers can rank any two bundles in their consumption set (known as “complete preferences”)
and that their rankings are logical (known as “transitive preferences”). As the following example shows, we are
imposing severe assumptions on preferences and fully recognize that in reality consumers can’t always rank bundles and
if they can, that their rankings can be illogical. First, some notation:
means “better than”
● Example: At 4 am, DJ Ajax prefers to spin Da After over Webaba
means “indifferent to”
● Example: Cindy is indifferent between Bottega Veneta and Louis Vuitton bags 6
ECO 204 CHAPTER 2 Modeling Consumer Choice and Behavior: Preferences and Budget Constraints (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Example: Consider the following DJs: Seth Troxler (listen to his Essential Mix. Be patient, it picks up) Tiesto (electronic music version of Vivaldi’s “Four Seasons” – sounds great at first but devoid of substance) Toronto’s Art Department (listen to their uncensored Essential Mix)
We ask three consumers of “electronic music” about their preferences over the following pairings:
● Seth Troxler vs. Tiesto? ● Tiesto vs. Art Department? ● Art Department vs. Seth Troxler?
Our first consumer is a philosophy student at Harvard. He’s busy reading Hegel, Wittgenstein, and other dead European
philosophers. Being an intellect...
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