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1、LectureTwoPreferences&UtilityConsumerschoosethebestbundleofgoodstheycanafford.Togivecontenttothistheory,twoconceptmustbedefines:“best”howtheconsumerdetermineswhatisbest?“canafford”howtodescribewhataconsumercanafford?TheoryofConsumerAconsumptionbundlecontainingx1unitsofcommodity1,
2、x2unitsofcommodity2andsoonuptoxnunitsofcommoditynisdenotedbythevector(x1,x2,…,xn).Commoditypricesarep1,p2,…,pn.BehavioralPostulate:Foradecision-maker,The“best”meansthemostpreferredalternative.ConsumptionBundleComparingtwodifferentconsumptionbundles,xandy:strictpreference:bundlexi
3、smorepreferredthany.Itisdenotedbyxy.weakpreference:xispreferredatleastasmuchasy.Itisdenotedbyxy.indifference:xisexactlyaspreferredasy.Itisdenotedbyx~y.PreferenceRelationsp~fTheyareordinalrelationsi.e.theystateonlytheorderinwhichbundlesarepreferred.xyandyximplyx~y.xyand(notyx)impl
4、yxy.NotesonPreferenceRelations~f~f~f~fpCompleteness:Foranytwobundlesxandyitisalwayspossibletomakethestatementthat eitherxyoryx,orboth.Reflexivity:Anybundlexisalwaysatleastaspreferredasitself;i.e.xx.Assumptionsabout PreferenceRelations~f~f~fTransitivity:If xisatleastaspreferredasy
5、,and yisatleastaspreferredasz,then xisatleastaspreferredasz;i.e.xyandyzxz.Assumptionsabout PreferenceRelations~f~f~fThetwo-goodassumptionisoftengeneralenoughforanalysisWhenstudyingaconsumer’sdemandforacommodity,itiscalledgood1.Good2representsacompositegoodthatstandsforeverythinge
6、lsethattheconsumermightwanttoconsumeotherthangood1.Forconvenient,good2maybethemoneythattheconsumercanusetospendonothergoods.TwoGoodsAreOftenEnoughTakeareferencebundlex’.Thesetofallbundlesequallypreferredtox’istheindifferencecurvecontainingx’:thesetofallbundlesy~x’.Sinceanindiffer
7、ence“curve”isnotalwaysacurveabetternamemightbeanindifference“set”.IndifferenceCurvesIndifferenceCurvesx2x1x’’’x’’’x’~x’’~x’’’x’IndifferenceCurvesx1zxyyppx2xzIndifferenceCurvesx1xyzAllbundlesinI1arestrictlypreferredtoallinI2.AllbundlesinI2arestrictlypreferredto allinI3.I1I2I3x2Ind
8、ifferenceCurvesI(x’)xI(x)WP(x),thesetofb
