Chapter 3 Preferences

1. Chapter 3Preferences

2. Assumptions about Preferences • Complete--Compare two bundles, A and B. There are three possibilities: A is preferred; B is preferred; they are indifferent • Reflexive--Any bundle is as good as itself, I.e., A>=A. (note: ”>“ represents “is preferred” and “=“ represents “indifferent”. • Transitive-- If A>=B and B>=C, then A>=C. • Strict Convexity (needed only for well-defined preferences)-- If A>=z and B>=z, then a*A+(1-a)*B> z. This assumption is equivalent to a diminishing MRS. The assumption is ad hoc.

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4. No Crossing Between Two Indifferent Curves • X is indifferent to Z (X=Z) and Y is indifferent to Z (Y=Z) [Note: = means “indifferent,” not “equal”] • Hence, X=Y=Z. However, X lies below the steeper indifferent curve, meaning that X is inferior to Y--- a contradiction.

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6. Some Special Preferences • Goods are perfect substitutes: U=ax+by [ex: U($1, $10) or U(yellow pencil, red pencil)] • Goods are perfect complements: U=min[ax, by] [ex: U(coffee, sugar)] • Y is a neutral good: U=x [ex: U(LeftShoe, .) for person only with the left foot; U(anchovies, pepperoni) ] • U(good, bad) [ex: U(apple, durian) ] • Satiated preference • Discrete goods

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15. MRS • Defined as the rate at which the consumer is willing to substitute one good for the other • It diminishes as more x is consumed if strict convexity holds.

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18. This concludes the Norton Media LibrarySlide Set for Chapter 3IntermediateMicroeconomics 6th EditionbyHal R. Varian W. W. Norton & CompanyIndependent and Employee-Owned