Chp 1 - Preferences and choice

Question 1

What is the meaning of monotonicity?

Answer 1

I prefer more of an item to less.

Question 2

What is local-non satiation?

Answer 2

Local non-satiation says that one can always do a little bit better, even if one is restricted to only small changes in the consumption bundle.

Local non satiation rules out “thick” indifference curves.

Question 3

What is walras law and its implication?

Answer 3

I spend my entire grocery budget in the store. I.e., \sum p_i x_i = w, where $w$ is my entire wealth = my budget.

Question 4

What is the implication of H.M 0?

Answer 4

Only real opportunity mathers.

Question 5

What qualifications need to be satisfied for a preference relationship to be rational?

Answer 5

The preference relationship is rational if it possesses the two properties:

1. Completeness. We can do pairwise comparisons between the goods in our basket.
2. Transitivity. $\forall x,y,z, \in X$ if $x \succeq y$ and $y \succeq z$ then $x \succeq z$.

Question 6

What two approaches to the theory of decision making is there?

Answer 6

1. Preference-based approach: we define preference relations and impose rationality assumptions. (Not directly observable)
2. Choice-based approach: we focus on observed behaviors and impose consistency of choice by the axiom of revealed preferences. (Directly observable)

Question 7

What is true regarding rationality and utility functions?

Answer 7

If a preferensrelationship exists and is rational, then

x\succeq y \Leftrightarrow u(x) ≥ u(y)

However, rational preference relations can’t always be described by a utility function.

Question 8

Does this satisfy WARP?

$C_1({x,y}) = {x}$

$C_2({x,y,z}) = {y}$.

Answer 8

No