Questions tagged [preferences]

Binary relations that reflect which states of the world an agent considers to be most desirable. Preferences are a fundamental ingredient in the axiomatic study of consumer choice decision theory.

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16
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2answers
5k views

What is the importance of Epstein-Zin preferences?

I've heard that there is a lot of work being done recently that applies Epstein-Zin preferences. The Wikipedia page doesn't seem to be very full. Why are Epstein-Zin preferences important? How does ...
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2answers
20k views

Lexicographic preference relation cannot be represented by a utility function

I am stuck on the following exercise, related to preference relations and von-Neumann-Morgenstern utility function. A farmer wants to dig a well in a square field $[0,1000]\times[0,1000]$. The ...
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4answers
77k views

What is the definition of exogenous and endogenous preferences?

Wikipedia states: Exogenous Preference -- one that comes from outside the model and is unexplained by the model. Endogenous Preference -- preferences then cannot be taken as given, but are affected ...
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4answers
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What is an example of a utility function where one good is inferior?

Say the consumer has a standard convex, monotonic preference over Apples and Bananas. (Update: I'd like the preference to be as 'standard' as possible. So ideally we have diminishing MRS everywhere ...
12
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2answers
2k views

What is the difference between "aggregation" and a "representative agent?"

What is the difference between "aggregation" and a "representative agent?" I'm sorry if I'm not entirely clear on this question, but that's why I ask. It seems to me as if a representative agent is ...
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3answers
985 views

When treating a relative, normalized utility function as a pmf, what is the interpretation of Shannon entropy or Shannon information?

Suppose $\Omega$ is a set of mutually exclusive outcomes of a discrete random variable and $f$ is a utility function where $0 < f(\omega) \leq 1$, $\sum_\Omega f(\omega) = 1$, etc. When $f$ is ...
10
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1answer
303 views

Has the assumption that individuals' tastes do not change over time been rigorously challenged?

In their seminal paper De Gustibus non est Disputandum, Stigler and Becker (1977) surveyed four classes of phenomena widely believed to be inconsistent with the stability of tastes: addiction, ...
10
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2answers
210 views

Fair voting procedure when there are many issues

When several people have to decide about a single yes/no issue*, the natural decision rule to use is the majority rule. But when there are many issues to decide upon, the majority rule is "unfair" ...
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2answers
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Thin indifference curves

If a consumer follows the rationality axiom of continuity (i.e. no jumps in his preferences), the indifference curves of a utility function are said to be thin. Why does continuity ($x \succeq y \...
9
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1answer
129 views

Weakly monotone preferences with singleton indifference curves: do any of them admit a utility representation?

Inspired by this question. The original question was answered by Amit with some nice examples. I would like to know the generalized answer: Suppose we have a preference ordering $\succeq$, which is ...
8
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2answers
3k views

Translog Preferences

What are translog preferences? The wikipedia article only clears up that it stands for transcendental logarithmic preferences, and that they are a generalization of Cobb-Douglas preferences. Do they ...
8
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1answer
3k views

Are homothetic preferences monotonic?

I'm trying to understand intuitively what a homothetic preference is, and I am still not quite there. I understand the definition, that a homothetic preference implies that the slope of the ...
8
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1answer
172 views

Linear Homothetic Utility

A Homothetic Utility is where $$ \forall x,y, \forall a \in \mathbb{R}_+: \ u(ax,ay)=au(x,y) $$ (or its monotonic transformation). A linear Homothetic utility is defined as $$ \forall x,y, \forall a \...
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1answer
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What is the purpose of the local non-satiation assumption in the first welfare theorem?

The profit maximization assumption implies $$\text{if } x_i \succ x_i^* \text{ then } p_ix_i > p_i w_i$$ Okay so this just says if the agent is utility maximizing / rational, then if he doesn't ...
7
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4answers
189 views

What are different ways of specifying utility and decision making?

This question is related to this question about the Machina paradox and about the expected utility model. In this question, I'd like to know a little more about various or even competing ways of ...
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4answers
5k views

Existence of utility representation of a rational but discontinuous preference

This is related to Do discontinuous preferences imply no continuous utility function? I think the title of the above-linked question is phrased in such a way that obscures a subtly different but more ...
7
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1answer
112 views

What are good dataset alternatives to estimate value functions?

Suppose we want to estimate for many goods in the economy (or classifications thereof) the preferences of each household for these goods. We may want to restrict the analysis to specific utility ...
7
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1answer
501 views

Selecting the best utility function for households

I have little to no background in micro, but I'm learning about utility functions. It seems that there are many forms of utility functions for households. In general terms, how does one go on to ...
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2answers
1k views

Relationship between strong and weak axioms of revealed preference

I keep seeing these following facts just asserted while reading: Let W = weak axiom of revealed preference Let S = strong axiom of revealed preference Let C = the commodity vector $W \iff S$ ...
6
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1answer
180 views

Consequences of hyperbolic discounting

In reading the Wikipedia article about hyperbolic discounting, I read that it says that hyperbolic discounting created strange consequences: But note, the time inconsistency of this behavior has ...
6
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1answer
687 views

If all indifference curves are parallel lines, then preference has linear representation

Given a continuous preference relation $\succeq$ over $X=\mathbb{R}^2_{+}$ where all sets: $$ I_x\equiv\{y\in X:y\sim x\} $$ are lines on $X,\forall x\in X$, and are parallel to $I_y,\forall y\notin ...
6
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2answers
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Local Non-Satiation Proof

I have been having trouble with how to go forward with a proof for about three days now. I know the basic structure of the proof, but can't seem to construct it. Basically, I am trying to do a proof ...
6
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1answer
158 views

GARP and SARP assumed mononticity?

Monotonicity means the decision maker prefer more goods than less. It is not mentioned in textbook that SARP and GARP preasumed monotonicity, implicitly. GARP: if $a$ is indirectly revealed preferred ...
6
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1answer
623 views

Lexicographic Preference Relation on the QxR

I would like to ask for your help. I recently learned that the Lexicographic Preference relation can be represented by a utility function $u:X\to\mathbb{R}$ on $\mathbb{Q}\times\mathbb{R}$ (but not $\...
6
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1answer
242 views

Generalized KPR: Frisch Elasticity

Consider the following version of KPR preferences (with $l$ being leisure): $$ U(c,l) = \left(\left(c\right)^\gamma l^\omega\right)^{1-\sigma}$$ I'm after the Frisch elasticity: $$ \frac{\partial(1-...
6
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1answer
271 views

Proving the De Finetti Theorem

Let us have a finite state space, $\Omega = {\omega_1,\cdots,\omega_s}$, where $2 \leq s < \infty$. Define a bet as a function $x:\Omega \rightarrow X$, where $X \subseteq \mathbb{R}^s$ is the set ...
6
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1answer
107 views

Tactical voting when the voting rule is unknown

The Gibbard-Satterthwaite theorem implies that, in every non-dictatorial voting system with 3 or more candidates, there is a preference profile in which some of the voters can gain by lying about ...
5
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2answers
2k views

Do discontinuous preferences imply no continuous utility function?

I am trying to think of a preference relation that can be represented by a utility function but such that there does not exist a continuous utility function. I know that you can represent continuous ...
5
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2answers
767 views

Why are we taking the logarithm for risk-averse decision-makers?

I'm a mathematics student learning a bit of Game theory. Many examples are given within a very economic setting and up to know I could follow most of it because they were very basic and I learnt some ...
5
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3answers
27k views

Completeness of Preferences

Economists assume that consumers have a set of preferences that they use to guide them in choosing between goods. These preferences have to satisfy three properties: completeness, transitivity and "...
5
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1answer
1k views

What is the difference between preferences lacking "completeness" and being indifferent?

If two preferences are complete, at least one must have a relationship to the other. If neither has a relationship, doesn't that mean that the consumer doesn't care which one he/she purchases?
5
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3answers
570 views

Preferences where wealth effect dominates

King-Plosser-Rebelo preferences satisfy balanced growth requirements, we have that income and substitution effects of labor cancel. Labor does not respond to a change in the wage level. Greenwood-...
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1answer
143 views

Necessary and sufficient conditions for the existence of a utility function

I was reading Jehle and Reny, Advanced Microeconomic Theory, where they discuss in detail, the choice problem of a consumer. The Consumption Set (or Choice Set) $X$ is a subset of $R_+^n$, is closed ...
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2answers
1k views

Continuous rational and monotone preference relation implies $x\succsim0$?

I updated my proof to a general version as follows: please share your thoughts & 2cent. Thanks Show a monotone continuous complete preorder on $\mathbb{R^L_+}$ has $y\geq x\rightarrow y\succsim ...
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2answers
1k views

What utility functions are equivalent to additive functions?

Call a utility function $u(x,y)$ additive if there exist functions $v_x,v_y$ such that: $$u(x,y)=v_x(x)+v_y(y)$$ Consider the function $u(x,y)=xy$. It is not additive, but, it can transformed using a ...
5
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1answer
193 views

What are the economic benefits of SLAPP in file sharing/piracy?

Spin-off from Piracy/File sharing - Why aren't songs, movies or ebooks given for free (+ads) like TV? What are the economic benefits of SLAPP in or out of file sharing/piracy? There's a comment in ...
5
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2answers
129 views

Utility function for introductory microeconomics

What are the utility functions standardly used in introductory microeconomics courses. My own list would include Perfect substitutes: $U(x,y) = ax+by$ Perfect complements: $U(x,y) = \min(ax,by)$ Cobb ...
5
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1answer
121 views

Quasiconcavification

Let $f_1, f_2$ be two smooth strictly-quasiconcave functions. Do there always exist monotone transformations $g_1,g_2$ such that the sum $g_1\circ f_1 + g_2 \circ f_2$ is ​a strictly-​...
5
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1answer
9k views

Is MRS supposed to have a minus sign or not? What's there to say about convexity of preferences?

If we have a utility function $U(x_1, x_2) = x_1(x_2+1)^2$ of some consumer, then $$MRS_{x_1, x_2} = \frac{\color{red}{-}(x_2+1)}{2x_1}$$ Some books have a $\color{red}{-}$. Others and Wiki don't ...
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0answers
33 views

Comparing voting methods when there are only two voters

Consider the Schulze, Kemeny-Young, Ranked Pairs and Borda count voting methods. (The last is obviously the odd one out in this list!) Suppose that there are only two voters. Each voter gives a ...
5
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0answers
194 views

Consumption-Leisure Elasticity

The macro-literature insists on a consumption-leisure elasticity of 0 to match the balanced growth fact of constant labor supply. Is there any paper that tries to evaluate this elasticity using ...
5
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1answer
154 views

Utility Representation of Lotteries

We went over a lemma in class leading up to a larger theorem. The Lemma states: Let $\succeq$ be a rational preference relation on $\mathscr{L}$ and let $\succeq$ admit utility representation under ...
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2answers
509 views

Sum of Homothetic Functions

If two utility functions represent homothetic preferences, will their sum also be homothetic?
4
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1answer
242 views

Rational preferences/individual decision-making theory

I am taking advanced micro course this semester. In one of the problems we need to determine whether the preference relation is rational (i.e. complete and transitive). Since we have not really ...
4
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2answers
14k views

How can I tell if 2 different utility functions represent the same preferences?

I need to verify that $u(x,y)=x^{1/3}y^{1/3}$ represents the same preferences as $v(x,y)=x^3y^3$. Obviously these are completely different functions with different derivatives, so what am I comparing? ...
4
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1answer
4k views

(Preference Relation/Set) Continuous $\succsim$ imply closedness of upper and lower contour sets

[ADDED/MODIFIED] : I have put my proof where the commodity space is simply $\mathbb{R_+}$(e.g. nonnegative reals) for simplicity below. Please share your 2 cent. I have put words to aid my own ...
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2answers
2k views

Risk Premium in the Expected Utility Theory

Consider an agent with utility function $u$, initial wealth $\omega$, and a random variable $x$. By definition of the risk premium $R$, we have $$ Eu(w+x) = u(w+E(x)-R). $$ The classical derivation ...
4
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1answer
594 views

How do I represent this indifference curve graphically?

I am not able to visualize this indifference curve. I consume only two goods: sugar and milk. I will prefer a bundle X of sugar and milk over a bundle Y only if $x_{sugar} > y_{sugar}$, and $x_{...
4
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2answers
147 views

Are these preferences consistent with rationality?

Suppose there are three kinds of commodities, X Y and Z. We ask an agent about his preferences and receive the following answers: "I prefer Z to Y and Y to X". "For every $n$, I ...
4
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1answer
390 views

Strict preference relations and utility representations

Suppose I have a rational preference relation $\succsim$ on some consumption set $X$. Suppose also that there is a utility function $u:X \to \mathbb{R}$ representing $\succsim$. Definition: A ...

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