A number of assumptions are typically made on preferences to give so-called “well-behaved indifference curves"

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5 pages

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Published date :

01/15/2009

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Table of Contents A number of assumptions are typically made on preferences to give so-called “well-behaved indifference curves" Table of Contents

 
  1. Introduction.
  2. Assumptions on preferences.
    1. Three axioms about preferences: The consumer is rational.
    2. Assumptions specific to well-behaved indifference curves.
  3. Assessment of these assumptions.
    1. Are the axioms of consumer theory reasonable?
    2. Are monotonicity, convexity and continuity reasonable assumptions?
  4. Conclusion.
  5. Bibliography.

Abstract

The consumer choice theory aims, among other things, at modeling preferences that will guide the consumer in his choices. To do this, an assumption will be made: the consumer is able to rank any two consumption bundles as to their desirability, that is, the consumer is aware of his own tastes and knows how to use them rationally in order to maximize his utility. In the neoclassical model, preferences relations are established following from an evaluation of the consumer's behaviour. Hence, it is considered that if he always chooses a consumption bundle A over a consumption bundle B, even where B is available and affordable, then A is strictly preferred to B (A > B). Similarly, other preferences relations are recognised: indifference (A ~ B) which means that A is equally preferred to B and vice versa; weak preference (A ≥ B) which means that A is preferred at least as much as B. An indifference curve (IC) is a set of bundles all equally preferred to each others. In other words, the IC that goes through A is the set of all bundles y such that A ~ y.

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