Show that if f : is a strictly increasing function and u : X is a utility function
representing preference relation , then the function v : X defined by v(x) = f(u(x)) is also a utility function representing preference relation . Since u() represents , then by Definition 1.B.2, for all x, y e X, x y if and only if u(x) > u(y). Since f is a strictly increasing function, u(x) > u(y) if and only if f(u(x)) > f(u(y)). Therefore, x y if and only if v(x) > v(y). That is, v() represents . 1.B.4. Consider a rational preference relation . Show that if u(x) = u(y) implies x ~ y and if u(x) > u(y) implies x y, then u() is a utility function representing . Suppose that x y. If, at the same time, y x, then (x y and y x) x ~ y, which in turn implies that u(x) = u(y). On the other hand, if not y x, then (x y but not y x) x y, which in turn implies that u(x) > u(y). Therefore, if x y, then u(x) > u(y). Conversely, assume that u(x) > u(y). If u(x) = u(y), then x ~ y, which implies that x y (and y x). On the other hand, if u(x) > u(y), then x y, which implies that x y (but not y x). Therefore, u(x) > u(y) x y. Since x y u(x) > u(y), then by Definition 1.B.2, u() represents . 1.B.5. Show that if X is finite and is a rational preference relation on X, then there is a utility function u : X that represents . [Hint: Consider first the case in which the individuals ranking between any two elements of X is strict (i.e., there is never any indifference and construct a utility function representing these preferences, then extend your argument to the general case.] As suggested by the hint, first consider the strict preference relation . Assume that is rational, i.e., complete and transitive, on X. We use the proof by mathematical induction to show that there exists u : X that represents . Basis (or base case) Trivial: Suppose X is a singleton, i.e., a set with only one element (N = 1). Then let u = c, where c is some real number. Alternatively and perhaps more instructively, suppose that X is a doubleton, i.e., a set with only two elements (N = 2). Specifically, let X = {x1, x2}. Since is assumed to be complete, then either x1 x2 or x2 x1. Accordingly, let u(xi) = 2 and u(xj) = 1 if and only if xi xj, where i, j = 1, 2 and i = j. Inductive step (Assume that the proposition is true for some N and show that it holds for N + 1) Let X = {x1, x2, . , xN, xN+1}. The induction hypothesis claims that there is a function u that represents . Without loss of generality, let u(x1) > u(x2) > > u(xN) (i.e., X is arranged such that x1 x2 xN). There are three exhaustive and mutually exclusive cases on how xN+1 is related to the elements of {x1, x2, . , xN}: (i) xi xN+1 for every i < N + 1, (ii) xN+1 xi for every i < N + 1, and (iii) xi xN+1 xj for some i < N + 1 and some j < N + 1. If case (i) applies, assign u(xN+1) < u(xN). [Note that then we have X = {x1, x2, . , xN, xN+1} where u(x1) > u(x2) > > u(xN) > u(xN+1). In effect, Definition 1.B.2 holds: Given X, where x1 x2 xN xN+1, there exists u : X such that u(xi) > u(xj) if and only if xi xj.] If case (ii) applies, assign u(xN+1) > u(x1). Suppose case (iii) applies. Define the sets I = {i e {1, . , N} : xi xN+1} and J = {j e {1, . , N} : xN+1 xj}. Since is complete and the strict preference relation implies that there are no ties (or, more precisely, that for any pair of elements in X either xk x or x xk), any n e {1, . , N} belongs to either I or J, but not to both, and that I J = {1, . , N}. [Suppose not. Case (a). Suppose there is an n such that n e {1, . , N} but n e I and n e J. Since n e I, xn xN+1. Since n e J, xN+1 xn. But (xn xN+1 and xN+1 xn) cannot be true at the same time. Case (b). Suppose there is an n such that n e {1, . , N} but n e I and n e J, so that I J = {1, . , N}. Then neither xn xN+1 nor xN+1 xn. But this implies that is not complete and therefore not rational.] Since is transitive, I and J are intervals in the sense that (a) if i e I and i' < i, then i' e I and (b) if j e J and j' > j, then j' e J. [Suppose i e I and i' < i. Since x1 x2 xN, it must be that xi' xi. Since i e I, then xi xN+1. By transitivity, (xi' xi and xi xN+1) implies that xi' xN+1. Therefore, i' e I. Suppose j e J and j' > j. Since x1 x2 xN, it must be that xj xj' . Since j e J, then xN+1 xj. By transitivity, (xN+1 xj and xj xj' ) implies that xN+1 xj' . Therefore, j' e J.] Let i * = max I and i * + 1 = min J. Assign u(xN+1) a real number that lies in the open interval (u(xi*+1), u(xi*)). Then Definition 1.B.2 holds: Given X, where x1 xi* xN+1 xi*+1 xN, there exists u : X such that u(x1) > > u(xi*) > u(xN+1) > u(xi*+1) > > u(xN). Now consider the weakly preferred relation (which allows the indifference relation ~) on X = {x1, . , xN}. For each n = 1, 2, . , N, define the set Xn = {xn' e X : xn' ~ xn}. [This means that each element of X is assigned an index number value n and, for each xn, we define a set Xn whose members xn' are elements of X such that the decision maker is indifferent between xn'
and xn. There are therefore as many sets Xn as there are elements xn in X.] Since X = {x1, . , xN} and each element xn is associated with a set Xn, 1 . N n n X X = = [To see this, simply pick the xn that is the reference element of Xn for every n. Then {x1} {xN} = X.] Since ~ is transitive (Proposition 1.B.1(ii)), if Xn = Xn , then Xn Xn = C. [Suppose not. Suppose that Xn = Xn but Xn Xn = C. Then there is an xk such that xk e Xn and xk e Xn . This implies that xk ~ xn for any xn e Xn and xk ~ xn for any xn e Xn . But by transitivity, if (xn ~ xk and xk ~ xn ) then xn ~ xn for any xn e Xn and any xn e Xn . In other words, Xn = Xn . Thus we have a contradiction.] Let M c {1, 2, . , N} such that m m M X X e = and Xm = Xm' for any m e M and m' e M with m = m'. [Note that the elements of M consist only of the values of n such that the sets Xns are unique. Example: Suppose the preference orderings are: x1 ~ x2, x3 ~ x5 ~ x9, x4 ~ x7, x6 ~ x8, and x1 x3 x4 x6 x10. Then X1 = X2 = {x1, x2}, X3 = X5 = X9 = {x3, x5, x9}, X4 = X7 = {x4, x7}, X6 = X8 = {x6, x8}, X10 = {x10}. Thus, 10 1 . n n X X = = But some Xns are duplicate sets and we can choose a selection of the Xns to get X, e.g., X1 X3 X4 X6 X10 = X.] Define a relation * on {Xm : m e M} such that Xm * Xm' if and only if xm * xm' . In fact, by the definition of the set M, it cannot be the case that Xm ~ Xm' for m = m'. Therefore, we can use the result on above: There exists a utility function u * : {Xm : m e M} such that u * (Xm) > u(Xm' ) if and only if Xm * Xm' . Define u : X such that u(xn) = u * (Xm) if m e M and xn e Xm. Finally, we show that u represents . If: Suppose xn xn' but not xn' xn. Then xn e Xm and xn' e Xm' such that Xm * Xm' , which implies that u * (Xm) > u * (Xm' ) and therefore u(xn) > u(xn' ). Suppose xn xn' and xn' xn. Then xn e Xm and xn' e Xm, which implies that u(xn) = u(xn' ) = u * (Xm). Combining the two cases, we have if xn xn' , then u(xn) > u(xn' ). Only if: Suppose u(xn) > u(xn' ). Then it must be that xn e Xm and xn' e Xm' such that u(xn) = u * (Xm) > u * (Xm' ) = u(xn' ), which implies that Xm * Xm' . In other words, xn xn' . In effect, we have if u(xn) > u(xn' ), then xn xn' . 1.C.2. Show that the weak axiom (Definition 1.C.1) is equivalent to the following property holding: Suppose that (a) B, B' e B, (b) x, y e B, and (c) x, y e B'. Then if x e C(B) and y e C(B'), we must have {x, y} c C(B) and {x, y} c C(B'). Given (a), (b), and (c), suppose WARP is satisfied. Then (i) x e C(B) implies that x e C(B') and (ii) y e C(B') implies that y e C(B). Therefore, {x, y} c C(B) and {x, y} c C(B'). Suppose the property described above is satisfied. Since the property yields [x e C(B) and x e C(B')] and [y e C(B') and y e C(B)], then WARP is satisfied. Therefore WARP PROPERTY: the two are equivalent.