ch3-PREFERENCES AND UTILITY.ppt

Axioms of rational choice Preference relations Binary relation Preference relations by binary relation Axioms of Rational Choice Axiom1：Completeness (set belong*） if A and B are any two situations, an individual can always specify exactly one of these possibilities: A is preferred to B B is preferred to A A is equally attractive with B Axioms of Rational Choice Axiom2: Transitivity if A is preferred to B, and B is preferred to C, then A is preferred to C Axioms of Rational Choice Definition: preference relation (Rationality ) The binary relation on the consumption set X is called a preference relation if it satisfied axiom 1 and axiom 2 Definition: strict preference relation Definition :indifference relation Axioms of Rational Choice Hypothetical preference satisfying axiom1 and axiom2 Axioms of Rational Choice Axiom3 :Continuity (lexicograpfic preference*) For all , the “at the least as good as” set ,and the “no better than” set ,are closed in if A is preferred to B, then situations suitably “close to” A must also be preferred to B used to analyze individuals’ responses to relatively small changes in income and prices Axioms of Rational Choice Axiom4’ :Local Nonsatiation For all , and for all ,there exist some Axiom4 : Strict Monotonicity －no bads Axioms of Rational Choice Axiom5’ :Convexity －balanced bundles are preferred to extreme bundles (contrary :螃蟹与柿子 )凸性 Axiom5 : Strict Convexity严格凸性 Axioms of Rational Choice Hypothetical preference satisfying axiom1 、axiom2 axiom3 、 axiom4 and axiom5’ or axiom5 Utility Function Utility Given these assumptions, it is possible to show that people are able to rank in order all possible situations from least desirable to most Economists call this ranking utility if A is preferred to B, then the utility assigned to A exceeds the utility assigned to B U(A) U(B) Utility Definition: a utility function representing the prefe