INTERMIC_LPPT_Ch3_Stude nt.pptx- Preferences

About preferences and the powerpoint.

1. CHAPTER 3 Preferences Copyright © 2019 Hal R. Varian

2. Rationality in Economics Behavioral Postulate : A decision maker always chooses his or her from his or her set of available . So, in order to understand and model choice, we must model decision maker . Copyright © 2019 Hal R. Varian

3. Preference Relations – 1 Comparing two different consumption bundles x and y : : x is more preferable than y . : x is at least as preferable as y . : x and y are equally preferable. Copyright © 2019 Hal R. Varian

4. Preference Relations – 2 Strict preference, weak preference, and indifference are all preference relations. In particular, they are relations; i.e., they state only the in which bundles are preferred. Copyright © 2019 Hal R. Varian

5. Preference Relations – 3 ?? denotes strict preference. x ?? y means that bundle x is strictly preferred to bundle y . ?? denotes indifference. x ?? y means that the individual is indifferent between bundles x and y . ?? denotes weak preference. x ?? y means that bundle x is preferred at least as much as is bundle y . Copyright © 2019 Hal R. Varian

6. Preference Relations – 4 x ≿ y and y ≿ x imply . x ≿ y and (not y ≿ x ) imply . Copyright © 2019 Hal R. Varian

7. Assumptions about Preference Relations – 1 Completeness : For any two bundles x and y it is always possible to make the statement that either or . Copyright © 2019 Hal R. Varian

8. Assumptions about Preference Relations – 2 Reflexivity : Any bundle x is always ; i.e., . Copyright © 2019 Hal R. Varian

9. Assumptions about Preference Relations – 3 Transitivity : If x is at least as preferred as y , and y is at least as preferred as z , then ; i.e., x ≿ y and y ≿ z ⇒ . Copyright © 2019 Hal R. Varian

10. Indifference Curves – 1 Consider a particular bundle x ʹ . The set of all bundles equally preferred to x ʹ is the ; the set of all bundles y ~ x ʹ. Since an indifference “ curve” is not always a curve a better name might be an indifference “set.” Copyright © 2019 Hal R. Varian

11. Indifference Curves – 2 Copyright © 2019 Hal R. Varian

12. Indifference Curves – 3 Copyright © 2019 Hal R. Varian

13. Indifference Curves – 4 Copyright © 2019 Hal R. Varian

14. Indifference Curves – 5 Copyright © 2019 Hal R. Varian

15. Indifference Curves – 6 Copyright © 2019 Hal R. Varian

16. Indifference Curves Cannot Intersect Copyright © 2019 Hal R. Varian

17. Slopes of Indifference Curves – 1 If more of a commodity is always preferred to less, then commodity is a “ .” If every commodity is a good then indifference curves are sloped. Copyright © 2019 Hal R. Varian

18. Slopes of Indifference Curves – 2 Copyright © 2019 Hal R. Varian

19. Slopes of Indifference Curves – 3 If less of a commodity is always preferred then the commodity is a “ .” Copyright © 2019 Hal R. Varian

20. Slopes of Indifference Curves – 4 Copyright © 2019 Hal R. Varian

21. Extreme Cases of Indifference Curves: Perfect Substitutes – 1 If a consumer always regards units of commodities 1 and 2 as equivalent, then the commodities are “ ” and only the of the two commodities in bundles determines their preference rank-order. Copyright © 2019 Hal R. Varian

22. Extreme Cases of Indifference Curves: Perfect Substitutes – 2 Copyright © 2019 Hal R. Varian

23. Extreme Cases of Indifference Curves: Perfect Complements – 1 If a consumer always consumes commodities 1 and 2 in fixed proportion (e.g., one-to-one), then the commodities are “ ” and only the of units of the two commodities determines the preference rank-order of bundles. Copyright © 2019 Hal R. Varian

24. Extreme Cases of Indifference Curves: Perfect Complements – 2 Copyright © 2019 Hal R. Varian

25. Preferences Exhibiting Satiation A bundle strictly preferred to any other is a “ ” or a “ .” Copyright © 2019 Hal R. Varian

26. Indifference Curves Exhibiting Satiation – 1 Copyright © 2019 Hal R. Varian

27. Indifference Curves Exhibiting Satiation – 2 Copyright © 2019 Hal R. Varian

28. Indifference Curves for Discrete Commodities – 1 A commodity is “ ” if it can be acquired in any quantity; e.g., water or cheese. A commodity is “ ” if it comes in unit lumps of 1, 2, 3, . . . and so on; e.g., aircraft, ships, and refrigerators. Copyright © 2019 Hal R. Varian

29. Indifference Curves for Discrete Commodities – 2 Suppose commodity 2 is an infinitely divisible good (gasoline) while commodity 1 is a discrete good (aircraft). What do the indifference “ curves ” look like? Copyright © 2019 Hal R. Varian

30. Indifference Curves with a Discrete Good Copyright © 2019 Hal R. Varian

31. Well-Behaved Preferences – 1 A preference relation is “ well-behaved ” if it is both: Monotonicity : of any commodity is always preferred (i.e., no satiation and every commodity is a good). Copyright © 2019 Hal R. Varian

32. Well-Behaved Preferences – 2 Convexity : Mixtures of bundles are to the bundles themselves. E.g., the 50-50 mixture of the bundles x and y is z is as x or y . Copyright © 2019 Hal R. Varian

33. Well-Behaved Preferences: Convexity – 1 Copyright © 2019 Hal R. Varian

34. Well-Behaved Preferences: Convexity – 2 Copyright © 2019 Hal R. Varian

35. Non-Convex Preferences Copyright © 2019 Hal R. Varian

36. Slopes of Indifference Curves The slope of an indifference curve is its “ ” ( ). How can a MRS be calculated? Copyright © 2019 Hal R. Varian

37. Marginal Rate of Substitution – 1 Copyright © 2019 Hal R. Varian

38. Marginal Rate of Substitution – 2 Copyright © 2019 Hal R. Varian

39. MRS and Indifference Curve Properties – 1 Copyright © 2019 Hal R. Varian

40. MRS and Indifference Curve Properties – 2 Copyright © 2019 Hal R. Varian

41. Credits This concludes the Lecture PowerPoint presentation for Chapter 3 of Intermediate Microeconomics, 9e. For more resources, please visit http://digital.wwnorton.com/intermicro9media . Copyright © 2019 Hal R. Varian