ECON BC 2075y Lecture Notes - Lecture 3: Allais Paradox, Pareto Efficiency, Cardinal Utility
13 Sep 2016
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Rationality and preference satisfaction, revealed preference theory, and pareto efficiency. Rational preferences: must be transitive and complete (homework hint) No self-interest, normative (going back to hobbes. Expected utility, cardinal utility and problem of interpersonal comparisons. Probability of a coin landing on head ( ) If land on head, , if not sh. Multiply probability amount by the pay off. With bernie vs trump vs hillary, no transitivity. Allais paradox- choice problem, inconsistency of actual observed choices with the predictions of expected utility theory. Condorcet"s (arrow"s) paradox- example: 3 issues, 3 voters. But something wrong because c is preferred to a head to head. Pro- economic benefit, more consumers more demand higher gdp, cost of production goes down we get to purchase cheaper goods. If sarah has a preference relation (satisfying etic. Sarah prefers x to y if sarah believes x is (strictly) better than y for her. Assume sarah and other individuals have perfect knowledge (strong)
