Download Presentation
## Preferences

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -

**Preference Relation**• The consumer strictly prefers bundle X to bundle Y: • The consumer is indifferent between X and Y:**Weak Preference**• If or • Then:**How are the relations related?**Q: What do these two relations imply?**How are the relations related?**A: The consumer is indifferent between X and Y:**Assumption I: Complete Preferences**For any two bundles X and Y: • X preferred to Y: • Y preferred to X: • Indifference:**Assumption II: Reflexive**Any bundle X is at least as good as itself:**Assumption III: Transitive**• If: • And: • Then:**Indifference curves**Indifference curve Weakly preferred set**Well-behaved preferences**• Let’s impose some extra assumptions to rule out less interesting situations • Well-behaved preferences satisfy two properties: • Monotonicity • Convexity**Monotonicity**• Consider two bundles: where Y has at least as much of both goods and more of one. • Then: • Monotonicity implies that indifference curves have negative slopes**Convexity**• Consider two bundles: • Convexity implies that, for**The MRS is the slope of the indifference curve at a point**MRS=derivative of indifference curve Marginal rate of substitution**Interpretation of MRS**• The MRS measures the rate at which the consumer is willing to substitute one good for the other. • If good 2 is measured in dollars, the MRS measures the consumer’s willingness to pay for an extra unit of good 1.