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Preference assignment help

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Preference assignment help

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  1. PREFERENCES

  2. Consumer preferences and related concepts We will suppose that given any two consumption bundles, (x1, x2) and(y1, y2), the consumer can rank them as to their desirability. That is, the consumer can determine that one of the consumption bundles is strictly better than the other, or decide that she is indifferent between the two bundles.

  3. Few symbols with their meaning

  4. These symbols are interrelated

  5. Assumptions about preferences 1 Complete. We assume that any two bundles can be compared. That is, given any x-bundle and any y-bundle, we assume that (x1, x2) (y1, y2), or (y1, y2) (x1, x2), or both, in which case the consumer is indifferent between the two bundles. in simple words, consumer should be able to make a decision between two goods. 2 Reflexive. We assume that any bundle is at least as good as itself: (x1, x2) > (x1, x2). 3. Transitive. If (x1, x2) > (y1, y2) and (y1, y2) > (z1, z2), then we assume that (x1, x2) > (z1, z2). In other words, if the consumer thinks that X is at least as good as Y and that Y is at least as good as Z, then the consumer thinks that X is at least as good as Z. transitive property is based on logic. If the consumer doesn't’ follow this behavior, then he cannot make a decision as there will be always one good that was preferred to it.

  6. Indifference curve An indifference curve is a graph showing different bundles of goods between which a consumer is indifferent higher indifference curve show higher level of satisfaction.

  7. Property of indifference curve Two I.C cannot intersect or cross each other In order to prove this, let us choose three bundles of goods, X, Y , and Z, such that Z lies only on one indifference curve, Y lies only on the other indifference curve, and X lies at the intersection of the indifference curves. By assumption the indifference curves represent distinct levels of preference, so one of the bundles, say Y, is strictly preferred to the other bundle, Z . We know that X ∼ Y and X ∼ Z , and the axiom of transitivity therefore implies that Z ∼ Y . But this contradicts the assumption that Y > Z. This contradiction establishes the result—indifference curves representing distinct levels of preference cannot cross.

  8. Examples of preferences Perfect substitutes Perfect complements Quasilinear

  9. Cobb Douglas

  10. The Marginal Rate of Substitution The MRS measures the rate at which the consumer is just willing to substitute one good for the other. Suppose that we take a little of good 1, Δx1, away from the consumer. Then we give him Δx2, an amount that is just sufficient to put him back on his indifference curve, so that he is just as well off after this substitution of x2 for x1 as he was before. We think of the ratio Δx2/Δx1 as being the rate at which the consumer is willing to substitute good 2 for good 1.

  11. Behavior of the MRS

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