Lecture 2 Flashcards
What is a utility function?
Summarises the preferences of a consumer in terms of how much satisfaction or utility, u, is gained from consuming an available good or bundle of goods.
Are the numbers involved in utility functions important?
No, what’s important is the ability to rank preferences
Why is it important to be able to rank bundles?
Because it helps to make predictions about how people make decisions, i.e which bundle will be preferred.
What is the independence of irrelevant alternatives?
Criterion which states that election results should not change if a losing candidate is left out
What are the four axioms of utility theory?
Completeness, Transitivity, Continuity and Independence
Is intransitivity necessarily irrational?
No, it can arise from the aggregation of rational individual preferences into a group preference ranking
What is Condorcet’s paradox?
The emergence of intransitive preferences from a group preference ranking, where each individual has rational and transitive preferences
What is a group preference defined by?
Takes individual preferences as inputs and outputs a preference ordering based on those preferences
What can cyclical preferences theoretically lead to?
The money pump paradox, in which a decision maker is willing to pay a repeated amount of money to have preferences satisfied without gaining any sort of benefit.
