Textbook Notes (369,205)
United States (206,227)
Economics (294)
ECON 326 (1)
Chapter

# Preferences and Utilities

3 Pages
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Department
Economics
Course Code
ECON 326
Professor
Ethan Kaplan

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Preferences and Utilities Examine how economists characterize individuals’preferences. The utility function the primary means by which economists examine individual choices. 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 B toA. 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
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