Chapter 3 Preferences

Assumptions about Preferences Complete--Compare two bundles, A and B. There are three possibilities: A is preferred; B is preferred; they are indifferent Reflexive--Any bundle is as good as itself, I.e., A>=A. (note: ”>“ represents “is preferred” and “=“ represents “indifferent”. Transitive-- If A>=B and B>=C, then A>=C. Strict Convexity (needed only for well-defined preferences)-- If A>=z and B>=z, then a*A+(1-a)*B> z. This assumption is equivalent to a diminishing MRS. The assumption is ad hoc.

03.01

No Crossing Between Two Indifferent Curves X is indifferent to Z (X=Z) and Y is indifferent to Z (Y=Z) [Note: = means “indifferent,” not “equal”] Hence, X=Y=Z. However, X lies below the steeper indifferent curve, meaning that X is inferior to Y--- a contradiction.

03.02

Some Special Preferences Goods are perfect substitutes: U=ax+by [ex: U($1, $10) or U(yellow pencil, red pencil)] Goods are perfect complements: U=min[ax, by] [ex: U(coffee, sugar)] Y is a neutral good: U=x [ex: U(LeftShoe, .) for person only with the left foot; U(anchovies, pepperoni) ] U(good, bad) [ex: U(apple, durian) ] Satiated preference Discrete goods

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MRS Defined as the rate at which the consumer is willing to substitute one good for the other It diminishes as more x is consumed if strict convexity holds.

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W. W. Norton & Company Independent and Employee-Owned This concludes the Norton Media Library Slide Set for Chapter 3 Intermediate Microeconomics 6th Edition by Hal R. Varian