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1、Chapter ThreePreferences *1PreferenceContentsnDescribe preferencesnIndifference curvesnWell-behaved preferencesnMarginal rate of substitutionDate2PreferenceRationality in Economicsn Behavioral Postulate: A decisionmaker always chooses its most preferred alternative from its set of available alternat
2、ives.nSo to model choice we must model decisionmakers preferences.Date3PreferencePreference RelationsnComparing two different consumption bundles, x and y: nstrict preference: x is more preferred than is y.nweak preference: x is as at least as preferred as is y.nindifference: x is exactly as preferr
3、ed as is y.Date4PreferencePreference RelationsnStrict preference, weak preference and indifference are all preference relations.nParticularly, they are ordinal relations; i.e. they state only the order in which bundles are preferred.Date5PreferencePreference Relationsn denotes strict preference; x y
4、 means that bundle x is preferred strictly to bundle y.ppDate6PreferencePreference Relationsn denotes strict preference; x y means bundle x is preferred strictly to bundle y.n denotes indifference; x y means x and y are equally preferred.ppDate7PreferencePreference Relationsn denotes strict preferen
5、ce so x y means that bundle x is preferred strictly to bundle y.n denotes indifference; x y means x and y are equally preferred.n denotes weak preference; x y means x is preferred at least as much as is y. ffppDate8PreferencePreference Relationsnx y and y x imply x y.ffDate9PreferencePreference Rela
6、tionsnx y and y x imply x y.nx y and (not y x) imply x y.ffffpDate10PreferenceAssumptions about Preference RelationsnCompleteness: For any two bundles x and y it is always possible to make the statement that either x y ory x.ffDate11PreferenceAssumptions about Preference RelationsnReflexivity: Any b
7、undle x is always at least as preferred as itself; i.e.x x.fDate12PreferenceAssumptions about Preference RelationsnTransitivity: 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.fffDate13PreferenceIndifference CurvesnT
8、ake 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.nSince an indifference “curve” is not always a curve a better name might be an indifference “set”.Date14PreferenceIndifference Curvesx x2 2x x1 1x”x”x”x”x x x” x
9、” x” x”xDate15PreferenceIndifference Curvesx x2 2x x1 1z z x x y yppxyzDate16PreferenceIndifference Curvesx2x1xAll bundles in I1 are strictly preferred to all in I2.yzAll bundles in I2 are strictly preferred toall in I3.I1I2I3Date17PreferenceIndifference Curvesx2x1I(x)xI(x)WP(x), the set ofbundles w
10、eaklypreferred to x.Date18PreferenceIndifference Curvesx2x1WP(x), the set ofbundles weaklypreferred to x.WP(x)includesI(x).xI(x)Date19PreferenceIndifference Curvesx2x1SP(x), the set ofbundles strictlypreferred to x,does notincludeI(x).xI(x)Date20PreferenceIndifference Curves Cannot Intersectx x2 2x
11、x1 1x x y y z zI I1 1I2From IFrom I1 1, x , x y. From I y. From I2 2, x , x z. z. Therefore y Therefore y z. z.Date21PreferenceIndifference Curves Cannot Intersectx x2 2x x1 1x x y y z zI I1 1I2From IFrom I1 1, x , x y. From I y. From I2 2, x , x z. z. Therefore y Therefore y z. But from I z. But fr
12、om I1 1and Iand I2 2we see y z, a we see y z, a contradiction. contradiction.pDate22PreferenceSlopes of Indifference CurvesnWhen more of a commodity is always preferred, the commodity is a good.nIf every commodity is a good then indifference curves are negatively sloped.Date23PreferenceSlopes of Ind
13、ifference CurvesBetterBetterWorseWorseGood 2Good 2Good 1Good 1Two goodsTwo goods a negatively sloped a negatively sloped indifference curve.indifference curve.Date24PreferenceSlopes of Indifference CurvesnIf less of a commodity is always preferred then the commodity is a bad.Date25PreferenceSlopes o
14、f Indifference CurvesBetterBetterWorseWorseGood 2Good 2Bad 1Bad 1One good and oneOne good and one bad a bad a positively sloped positively sloped indifference curve.indifference curve.Date26PreferenceExamplesnPerfect substitutesnPerfect complementsnSatiationnDiscrete goodsDate27PreferenceExtreme Cas
15、es of Indifference Curves; Perfect SubstitutesnIf a consumer always regards units of commodities 1 and 2 as equivalent, then the commodities are perfect substitutes and only the total amount of the two commodities in bundles determines their preference rank-order. Date28PreferenceExtreme Cases of Indifference Curves; Perfect Substitutesx x2 2x x1 18 88 815151515Slopes are constant at - 1.Slopes are constant at - 1.I2I1Bundles in IBundles in I2 2all have a total all have a total of 15 units and are strictlyof