Consumer Preference Theory:
Consumer preferences will tell us how an individual would rank (i.e. compare the desirability of) any two consumption bundles (or baskets) assuming the bundles were available at no cost.
Of course a consumer’s real choice will ultimately depend on a number of factors in addition to preferences.
Assumptions about the consumer preferences:
a. completeness: A › B , A ‹ B , or A ≈ B
b. transitivity: If A f B and B f C , then A f C
c. continuity - Steady change in preference with gradual change in consumption
d. monotonicity - strong non-satiation or ‘more is better’
→ continuous utility function
Cardinal vs. Ordinal Utility:
U = √xy
Example: U = √H + R, where H is number of hamburgers and R is number of root beer.
Properties of Indifference Curves:
a) Downward sloping.b) Convex to the source.c) Indifference curves can’t intersect.d) Each consumption bundle lies on one and only one indifference curve (everywhere dense).e) Indifference curves aren’t ‘thick’.f) The farther from the source the more utility it has.
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