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**preview**shows half of the first page. to view the full**1 pages of the document.**Topic 1 ā Preference

(Lecture 2 ā Sept 21st)

ļ¬ Puzzles (intro to consumer choices)

1. Individuals in need receive voucherās (housing, food) or cash w/no restrictions with respect to use;

Q: which one is more preferable?

2. Cell phone company setting up pricing program:

Plan 1: fixed sum, w/unlimited minutes & data;

Plan 2: fixed sum, w/ x # of minutes & y # of data, and charge you for additional units;

Plan 3: no fixed sum, charge per unit;

Q: what would be the optimal?

ļ¬ āCommodity Bundleā

ā an order list of goods;

-- Suppose N goods, defined by x1, x2, ā¦ , xn

-- Bundle X = (x1, x2,ā¦,xn)

-- Bundle Y = (y1,y2,ā¦,yn)

-- Consumers would be able to compare goods in two bundles, be able to rank/weigh these goods from

āmost preferredā to ālease preferredā;

-- Common that preferences for different customers are different (different values)

ļ¬ Notation:

-- āX ā» Yā ļØ consumer āstrictly prefersā X to Y

-- āXļ½Yā ļØ consumer is āindifferentā between X and Y

-- āX ā»= Yā ļØ consumer āweakly prefers X to Yā OR āConsumer prefer X to Y or indifferentā

ļ¬ Axioms of ārationalā behavior

1. Completeness: if the consumer has to compare two bundles X, Y

One of (āXā»Yā OR āXļ½Yā OR āX ā»= Yā) must be true;

(e.g. ruling out the cases of āidkā)

2. Reflective: Any bundle is as good as itself (consumer is indifferent between the bundle and itself)

3. Transitivity: e.g. X ā» Y, Y ā» Z ļ X ā» Z

(e.g. yellow ā» green; green ā» grey ļØ we assume that yellow ā» grey,

but in real life there are cases where grey ā» yellow )

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