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Microeconomics Consumer Theory

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Pioblem 1: Axioms on piefeiences

!

!

! !

!

, !

!

! !

!

By uefinition, !

!

! !

!

means !

!

! !

!

but not !

!

! !

!

So, !

!

! !

!

! !

!

By tiansitivity, this means !

!

! !

!

Now, suppose insteau we have !

!

! !

!

. Since !

!

! !

!

, by tiansitivity !

!

! !

!

But theie is a contiauiction heie because we know that !

!

! !

!

So, we have shown that by tiansitivity !

!

! !

!

is tiue, anu by contiauiction

!

!

! !

!

cannot holu.

Theiefoie, we concluue !

!

! !

!

Pioblem 2: 0tility Functions

1. The binaiy ielation ! on the consumption set X is calleu a piefeience

ielation if it satisfies Axioms 1 anu 2.

Axiom 1 Completeness: Foi all !

!

anu !

!

in X, eithei !

!

! !

!

oi !

!

! !

!

.

a. Since bunule !

!

is bettei than !

!

whenevei !

!

! !

! !

! !

!

!

!

! !

, it is possible to uesciibe all the ielationships between

bunules. This satisfies axiom 1.

Axiom 2 Tiansitivity: Foi any thiee elements !

!

, !

!

anu !

!

in X, if !

!

! !

!

anu !

!

! !

!

, then !

!

! !

!

.

a. Suppose theie was a thiiu bunule !

!

, given !

!

is bettei than !

!

whenevei !

!

! !

! !

! !

!

! !

! !

, by tiansitivity this means that

!

!

! !

!

if !

!

! !

! !

! !

!

! !

! !

. Theiefoie tiansitivity is

satisfieu.

Thus, ! iepiesents piefeience ielations.

2. Axiom S Continuity: Foi all ! ! !

!

!

, the 'at least as goou as' set, ! !!!,

anu the 'no bettei than' set, ! !!!, aie closeu in !

!

!

.

Axiom 4 Stiict Nonotonicity: Foi all !

!

! !

!

! !

!

!

, if !

!

! !

!

, then !

!

! !

!

,

while if !

!

! !

!

, then !

!

! !

!

.

a. Foi Axiom S,

! !

!

! !!

!

! !!!

!

! !

!

! when !

!

! !

! !

! !

!

! !

! !

! !

!

! !!

!

! !!!

!

! !

!

! when !

!

! !

! !

! !

!

! !

! !

This ieaus as; the uppei contoui set (!

!

) that is weakly piefeiieu

to set !

!

is closeu when !

!

! !

! !

! !

!

! !

! !

is satisfieu, anu

the lowei contoui set (!

!

) that is no bettei than to set !

!

is closeu

when !

!

! !

! !

! !

!

! !

! !

is satisfieu. Baseu on this uefinition,

the continuity axiom is met.

b. Foi Axiom 4,

given ! ! !!!!! anu that bunule !

!

is weakly piefeiieu to !

!

whenevei !

!

! !

! !

! !

!

! !

! !

, if !

!

contains u.7 units anu !

!

contains u.6 units, !

!

! !

!

, uespite !

!

> !

!

. So in this case,

monotonicity is not satisfieu since moie is not necessaiily bettei.

Foi axiom 4 to be satisfieu, the set must be iestiicteu to the iegion

! ! !!!!!!!, so that the moie of one bunule (e.g. !

!

! !

!

)

necessitates in the piefeience of !

!

! !

!

.

S. Theoiem 1.1: If the binaiy ielation ! is complete, tiansitive, continuous,

anu stiictly monotonic, theie exists a continuous ieal-valueu function,

!! !

!

!

! !, which iepiesents !.

a. Fiom pait 2.2, it has been establisheu that ovei the iegion

! ! !!!!!, axiom 4 is violateu. Bowevei, theoiem 1.1 only states

sufficient conuitions foi the existence of a !, which uoes not

necessaiily mean that the theoiem uoes not still allow foi a ! to

exist.

4. In pioving theoiem 1.1, sets A anu B aie uefineu as:

! ! ! ! ! !" ! ! ! ! !! ! !!!" ! !!

wheie ! ! !!!, anu !

!

! ! ! ! will uefine ! ! !!! when ! ! ! !

!

such

that ! ! !!!!!, anu !

!

! !

!

whenevei !

!

! !

! !

! !

!

! !

! !

.

The pioof fails in ueteimining the uniqueness of ! ! . Suppose theie is

only one numbei such that !

!

!!!!!

!

!, by tiansitivity this means !

!

!!!

!

!.

But it is no longei tiue that holus when stiict monotonicity is violateu

because !

!

! !

!

! !

!

! !

!

anu !

!

! !

!

all can iepiesent !

!

!!!

!

!.

S. Fiom pait 2.4, a utility function can be pioven to exist.

In the iegion of ! ! !!!!!, since stiict monotonicity is violateu, set A is tiue

when ! ! ! is in the inteival of !!!!!!! anu when ! ! ! is in the inteival of

!!!!!!!.

Similaily foi set B, it is tiue when ! ! ! in the inteival of !!!!!!! anu when

! ! ! is in the inteival of !!!!!!!, with all sets closeu given the assumption

of continuity.

Suppose theie is a ! that uoesn't exist in the set of A anu B. Fiom

completeness, it must be the case that eithei !" ! ! oi !" ! !. But this

must mean that ! ! ! ! ! foi eithei case to holu. Thus, by pioof of

contiauiction, theie is at least one !

!

that iepiesents ! ! .

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