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Lecture

BSEN 401 Lecture Notes - Indifference Curve


Department
Business and Environment
Course Code
BSEN 401
Professor
William Huddleston

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PREFERENCES AND INDIFFERENCES CURVES
For any two consumption bundles (X0, Y0) and (X1, Y1), define an individual’s preference
ranking of each of the two bundles by
1. (X1, Y1) (X0, Y0) means the individual prefers (X1, Y1) to (X0, Y0)
2. (X1, Y1) ~ (X0, Y0) means the individual is indifferent between (X1, Y1) and (X0, Y0)
Preference Assumptions
1. Completeness
For every pair of consumption bundles (X1, Y1) and (X0, Y0), (X1, Y1) (X0, Y0) or (X0,
Y0) (X1, Y1) or (X1, Y1) ~ (X0, Y0)
i.e. The consumer prefers one or other bundle or is indifferent between them. In short the
consumer does not make contradictory choices.
2. Transitivity
(X1, Y1) (X0, Y0) and (X0, Y0) (X2, Y2) => (X1, Y1) (X2, Y2)
(where means either preferred to or indifferent to)
3. Non-Satiation (More is always preferred to Less)
If both X1 or Y1 are at least equal to X0 or Y0 respectively and at least one of X1 or Y1 is a
greater amount than X1 or Y1 respectively, then
(X1, Y1) (X0, Y0)
This assumption is sometimes called the monotonicity of preferences
4. Convex
The less one has of a good, the more one requires of the other good in exchange to remain
indifferent.
[Assumption 1 follows from the assumption that economic agents are rational
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