Topic 1 - Part 1: Rational Choice Flashcards
(33 cards)
What type of relations are these examples:
Betsy is younger than Alfred
Germany is bigger than Norway
These example express a relation between two entities - they are binary relations
Example:
Betsy is younger than Alfred: bRa
Germany is *bigger than** Norway: gRn
What do the small and large letter denote?
Small letters denote entities
Capital letters denote relations
What does the term universe specify
The term universe specifies what sort of entities may be related to one another
When we talk about a preference relation, what term do we use to describe it?
‘Is at least as good as’
If x is at least as good as y, and y is at least as good as x, what type of relations is observed.
The indifference relation
A rational preference relation is a preference relation that
is
transitive and complete
If a person prefers (A) over (B) and (B) over (C), then they must also prefer (A) over (C).
This is an example of what?
Transitivity: This ensures consistency in preferences.
For any two options, say (A) and (B), a person can always say which one they prefer or if they are indifferent between them. In other words, given any two choices (A) and (B), either:
(A) is preferred to (B)
(B) is preferred to (A), or
The person is indifferent between (A) and (B)
This is known as….
Completeness
Since we assume preferences are rational (transitive and
complete), a preference ordering can be constructed. What roles do completeness and transitivity play in this preference ordering?
Completeness guarantees that there will be only one
ordering; transitivity guarantees that there will be no cycles
in strict preference.
Economists like to use numbers to represent strength of
preference. This is done through what?
Utility Functions
A utility function associates a number with each member of
the universe (assuming ………)
Completeness
What is a Consumption set (or, menu)
The space of all possible
bundles of goods and services.
To make rational choices, means: (2 things)
(1) that you have a rational preference ordering, and
(2) that whenever you are faced with a menu (consumption
set), you choose the most preferred item, or (in the case of
ties) one of the most preferred items.
Why do economists insist on
rational choice?
Samuelson (1938) identifies choice as a more fundamental
notion than preference mostly because the latter is not
observable while the former is.
Suppose we observe the consumption choices that a
consumer makes for different budgets. We can use this
information to do two things
(1) Test rational choice; hence, the behavioural hypothesis
that a consumer chooses the most preferred bundle from
those available;
(2) Discover the consumer’s preference relation.
What does A ⊂ X mean?
( A ) is a proper subset of ( X ). In other words, ( A ) contains some, but not necessarily all, elements of ( X ), and ( X ) has additional elements that are not in ( A ).
What is the ultimate goal of Behavourial Economics?
The ultimate goal of Behavioural Economics is to construct theories of behaviour. Behavioural Economics is not experimental economics.
3 Examples of Methods used to identify anomalies
- Laboratory experiments involve real people, choices, and incentives, though in a laboratory setting.
- Field experiments randomly assign participants to test and control groups and track how their behaviour differs in “the real world”
- Process measures combine these results with brain scans and other data to provide a model of the decision-making process.
Which word can be used interchangeably with decision
Choice
Which theory of decision describes how people in fact make decisions
A descriptive theory
Which theory of decision captures how people should make decisions
A normative theory
What does WARP stand for? What is it?
The Weak axiom of revealed preference
If A, B feasible and A chosen, then at any prices and income where A, B are feasible, the consumer will choose A over B. This axiom says two things:
1. People choose what they prefer
2. Preferences are consistent
Suppose x is revealed as directly preferred to y, and y is revealed to be directly preferred to z. Then, by transitivity, x is revealed as …….
indirectly preferred to z
X being chosen when y is available and y being chosen when x is available, is an example of what?
A violation of the Weak Axiom of Revealed Preference (WARP)
