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Lecture 3

ECON BC 2075y Lecture Notes - Lecture 3: Allais Paradox, Pareto Efficiency, Cardinal Utility

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ECON BC 2075y
Belinda Archibong

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Utilitarianism and Consequentialism
Lecture 2 Recap
Rationality and preference satisfaction, revealed preference theory, and pareto efficiency
Rational preferences: must be transitive and complete (homework hint)
○ Consistency
No self-interest, normative (going back to Hobbes
Expected utility, cardinal utility and problem of interpersonal comparisons
Expected utility
Probability of a coin landing on head (½)
If land on head, $10, if not $0
What is expected value of this lotto? ½ (10) + ½ (0) = 5
Multiply probability amount by the pay off
Ex. ¼ (20) + ¾ (4) = 8
Voting and preferences
Or why majority voting might not be a great way of satisfying society's
preferences and distributing things?
Problem of rational preferences
Is democracy rational? 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
Mena’s ranking A>B>C
David C>A>B
Martha B>C>A
Votes→ Winner
A vs. B: A, A, B
B vs. C: B, B, C
● A>C
C vs. A: A, C, C
But something wrong because C is preferred to A head to head
Immigration: Is it good for the US economy or not?
Pro- economic benefit, more consumers→ more demand→ higher GDP, cost of
production goes down → we get to purchase cheaper goods
Con- take jobs, national security issue
Economic benefits→ US welfare
Immigration argument rhetoric draws from utilitarianism
Preference Satisfaction & Pareto Efficiency
Rationality + self-interested individuals:
If sarah has a preference relation (satisfying etic.):
Sarah prefers x to y if Sarah believes x is (strictly) better than y for her
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