Preferences and Utilities
Examine how economists characterize individuals’preferences.
The utility function the primary means by which economists examine individual
Axioms of Rational Choice
Axioms/ Postulates that characterize rational behavior:
Preference:Acertain individual will state that he or she prefers a certain situation
to another or finds one situation more attractive to another situation. There three
basic properties that are assumed to be under the preference relation:
1. Completeness. ifAand B are any two situations, an individual may state an
one of the following:
a. Ais preferred to B
b. B is preferred toA
c. Aand B are equally attractive
This property assumes that an individual isn’t indecisive, and that he or she
completely understands and can make up his or her mind about the
desirability of two alternatives. The property also assumes that one
individual cannot state that he or she prefersAto B and that he or she prefers
2. Transitivity. When an individual states the he or she prefersAto B and
prefers B to C, then he or she should state that he or she prefersAto C. This
property assumes that an individual’s decisions are internally consistent.
However this conclusion should be modified in situations where the
individual is unaware of the consequences associated with the decision that
he or she has made.
3. Continuity. This property makes the assumption that if an individual prefers
Ato B then conditions suitably close toAare also preferred to B. This
assumption is useful when analyzing individuals’decisions when there are
changes in income and prices.
Utility People rank possible situations from the least desirable to the most--ranking utility
(Jeremy Bentham). Additionally, it is right to say that more desirable situations
offer more utility than the least desirable ones. Basically, if an individual prefersA
to B then the utility attached toAU(A) exceeds that attached to B, U(B).
Nonuniqueness of utility
Utility rankings are ordinal r