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Lecture

# Topic 1 - Preferences

Department
Economics
Course Code
ECO206Y1
Professor
Loren Brandt

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Topic 1 ā Preference
(Lecture 2 ā Sept 21st)
ļ¬ Puzzles (intro to consumer choices)
1. Individuals in need receive voucherās (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¬ āCommodity 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
āmost preferredā to ālease preferredā;
-- Common that preferences for different customers are different (different values)
ļ¬ Notation:
-- āX ā» Yā ļØ consumer āstrictly prefersā X to Y
-- āXļ½Yā ļØ consumer is āindifferentā between X and Y
-- āX ā»= Yā ļØ consumer āweakly prefers X to Yā OR āConsumer prefer X to Y or indifferentā
ļ¬ Axioms of ārationalā behavior
1. Completeness: if the consumer has to compare two bundles X, Y
One of (āXā»Yā OR āXļ½Yā OR āX ā»= Yā) must be true;
(e.g. ruling out the cases of āidkā)
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 ļØ we assume that yellow ā» grey,
but in real life there are cases where grey ā» yellow )