Beruflich Dokumente
Kultur Dokumente
Assignment 1
Must be handed in, in class, Tuesday 14 January 2014
Answer all questions in the space provided. Please write clearly and concisely.
1. What does it mean to say that a utility function, u(), represents a preference relation
on some choice set X? Prove that if u() represents preference relation %, this preference
relation must be complete and transitive.
ANSWER
We will work with the at least as good as preference relation, %, because this is the
basic one used in MWG. u(), represents % on some choice set X if
for all a, b X, a % b if and only if u (a) u (b) .
Now we want to prove that if u() represents preference relation %, this preference relation
must be complete and transitive.
Complete: complete means that for any a, b X either a % b or b % a or both. If u()
represents preference relation % then u(a) and u(b) exist and they are real numbers, which
are themselves complete. Either u(a) u(b) in which case a % b or u(b) u(a) in which
case b % a, or possibly u(a) = u(b) in which case a b.
Transitive: transitive means that for any a, b, c X where we know a % b and b % c, we
are allowed to deduce that a % c. And, again, if u() represents preference relation % on X
the transitivity of % will follow from the transitivity of the real numbers. Thus, a % b and
b % c implies u(a) u(b) u(c). Since these are real numbers we know that u(a) u(c)
and thus a % c.
2. Suppose X = <2+ and (a1 , a2 ) (b1 , b2 ) when a1 > b1 , or a1 = b1 and a2 > b2 . Is this
preference relation complete, transitive and continuous? Defend your answers carefully.
ANSWER
This is the lexicographic preference relation with good 1 dominant. It is complete and
transitive but not continuous.
Completeness
Let a and b be any two distinct points in <2+ . If a1 > b1 then a b; if b1 > a1 then b a;
if a1 = b1 and a2 > b2 then a b; and, finally, if a1 = b1 and b2 > a2 then b a. Since these
four cases are the only ones possible, must be complete.
Transitivity
Let a, b, c be any three elements in <2+ where a b and b c. We have to prove
that a c. By the definition of lexicographic preferences and the transitivity of the real
numbers, a1 c1 . If a1 > c1 then a c; if a1 = c1 then a1 = b1 = c1 and then it must be
that a2 > b2 > c2 and thus again a c.
Continuity
Let
2
2
{xn }
n=1 <+ , {yn }n=1 <+ , xn yn , for all n
lim
lim
xn = x and
y = y.
n
n n