Preferences and utility Consumer preferences

Consumer Preferences

Sung Ah Bahk
Reading: Osborne and Rubinstein [Ch.1], [Ch.3]

September 2, 2020

1 / 15
Preferences and utility Consumer preferences

Lexicographic preferences

An individual has in mind two complete and transitive binary relations, <1
and <2 . The individual’s preference relation < is defined by x < y if
i) x 1 y or ii) x ∼1 y and x <2 y .

Lexicographic preference is a binary relation

2 / 15
Preferences and utility Consumer preferences

Lexicographic preferences

An individual has in mind two complete and transitive binary relations, <1
and <2 . The individual’s preference relation < is defined by x < y if
i) x 1 y or ii) x ∼1 y and x <2 y .

Lexicographic preference is a binary relation

Not All preference relations on infinite set can be represented by utility

functions.

2 / 15
Preferences and utility Consumer preferences

Utility functions

3 / 15
Preferences and utility Consumer preferences

Practice questions

Let X be the set of all positive integers.

An individual prefers the number 8 to all other numbers. Comparing a pair
of numbers different from 8 he prefers the highest number. Construct a
utility function that represents these preferences.
An individual prefers the number 8 to all other numbers. Comparing a pair
of numbers different from 8 he prefers the number that is closer to 8.
Construct a utility function that represents these preferences.

4 / 15
Preferences and utility Consumer preferences

Bundle of goods

We consider the set X of all alternatives that a consumer may face to be the
set of all pairs of nonnegative real numbers. We refer an element (x1 , x2 ) ∈ X
as a bundle and interpret it as a pair of quantities of two goods.

5 / 15
Preferences and utility Consumer preferences

Preferences over bundles

6 / 15
Preferences and utility Consumer preferences

Preferences over bundles

7 / 15
Preferences and utility Consumer preferences

Preferences over bundles

8 / 15
Preferences and utility Consumer preferences

Monotonicity

The assumption that goods are desiable

9 / 15
Preferences and utility Consumer preferences

Continuity

A Lexicographic preference relation is not continuous.

10 / 15
Preferences and utility Consumer preferences

Continuity

11 / 15
Preferences and utility Consumer preferences

Convexity

Convex set: contains line segment between any two points in the set. For any
x1 , x2 ∈ X , and any λ ∈ [0, 1], λx1 + (1 − λ)x2 ∈ X .

12 / 15
Preferences and utility Consumer preferences

Convexity

13 / 15
Preferences and utility Consumer preferences

Convexity

14 / 15
Preferences and utility Consumer preferences

Practice questions

For the preference relation represented by each of the following utility

functions, draw some representative indifference sets and determine (without
providing a complete proof) whether the preference relation is monotone,
continuous, and convex.

max{x1 , x2 }
log(x1 + 1)+ log(x2 + 1)

15 / 15