Kapitel 2: The preference ordering Flashcards
Consumption bundles
Preference relations
Properties of preference relations
Completeness
Trasitivity
Reflexivity
non-satiation
Continuity
strict convexity
Properties of preference relations: Completeness
Properties of preference relations: Transitivity
Properties of preference relations: Reflexivity
Properties of preference relations: Non-satiation
Properties of preference relations: Continuity
Properties of preference relations: Strict convexity
Lexicographic preference relation
Diagram: Lexicographic preferences
Indifference curves
Properties of indifference curves
- Ubiquity: Completeness implies that there is an indifference curve through every bundle.
- Downward-sloping: Non-satiation implies that if we increase the amount of one good, we must reduce the amount of some other good to remain indifferent.
- Cannot cross: Take two different indifference curves (one with bundles strictly preferred to the other). Suppose they cross. Using transitivity we reach the contradictory conclusion that bundles in each of these curves are indifferent to each other.
- Convex: These property follows from the convexity of preferences.
Utility functions
Ordinal utility
Although utility functions are numerical representations of preferences, the number attached to a bundle does not have any meaning.
Neither does the difference between the utilities of two different bundles.
It is only important that the numbers increase as more preferred indifference sets are reached.
This is referred to as ordinal utility.
-> rule of transformation
Indifference curves as levels of the utility function
Marginal utility
Marginal rate of substitution (MRS)
MRS as the slope of an indifference curve
Calculation of MRS via the total differential of the utility function
