microeconomic theory preferences and utility

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1、CHAPTERTHREEPreferencesandUtilityInthischapterwelookatthewayinwhicheconomistscharacterizeindividuals’prefer-ences.Webeginwithafairlyabstractdiscussionofthe‘‘preferencerelation,’’butquicklyturntotheeconomists’primarytoolforstudyingindividualchoices—theutilityf

2、unction.Welookatsomegeneralcharacteristicsofthatfunctionandafewsimpleexamplesofspecificutilityfunctionswewillencounterthroughoutthisbook.AxiomsofRationalChoiceOnewaytobeginananalysisofindividuals’choicesistostateabasicsetofpostulates,oraxioms,thatcharacterize‘

3、‘rational’’behavior.Thesebeginwiththeconceptof‘‘prefer-ence’’:Anindividualwhoreportsthat‘‘AispreferredtoB’’istakentomeanthatallthingsconsidered,heorshefeelsbetteroffundersituationAthanundersituationB.Thepreferencerelationisassumedtohavethreebasicpropertiesasf

4、ollows.I.Completeness.IfAandBareanytwosituations,theindividualcanalwaysspecifyexactlyoneofthefollowingthreepossibilities:1.‘‘AispreferredtoB,’’2.‘‘BispreferredtoA,’’or3.‘‘AandBareequallyattractive.’’Consequently,peopleareassumednottobeparalyzedbyindecision:Th

5、eycom-pletelyunderstandandcanalwaysmakeuptheirmindsaboutthedesirabilityofanytwoalternatives.TheassumptionalsorulesoutthepossibilitythatanindividualcanreportboththatAispreferredtoBandthatBispreferredtoA.II.Transitivity.Ifanindividualreportsthat‘‘Aispreferredto

6、B’’and‘‘BispreferredtoC,’’thenheorshemustalsoreportthat‘‘AispreferredtoC.’’Thisassumptionstatesthattheindividual’schoicesareinternallyconsistent.Suchanassumptioncanbesubjectedtoempiricalstudy.Generally,suchstudiesconcludethataperson’schoicesareindeedtransitiv

7、e,butthisconclusionmustbemodifiedincaseswheretheindividualmaynotfullyunderstandtheconsequencesofthechoicesheorsheismaking.Because,forthemostpart,wewillassumechoicesarefullyinformed(butseethediscussionofuncertaintyinChapter7andelsewhere),thetran-sitivitypropert

8、yseemstobeanappropriateassumptiontomakeaboutpreferences.III.Continuity.Ifanindividualreports‘‘AispreferredtoB,’’thensituationssuitably‘‘closeto’’AmustalsobepreferredtoB.Thisrathertechnica