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## Hot answers tagged preferences

9

I think CompEcon covered most of the points that I was going to mention. Just a few last thoughts: 1) Why are Epstein-Zin preferences important? The preferences are important because they allow you to separate two of the dimensions along which people care about their allocations; namely, risk aversion and intertemporal substitution. Additionally, one ...

9

This is only a quick answer, unfortunately. The key intuitive insight for Epstein-Zin is that they separate two distinct properties of preferences: risk aversion ("I'd prefer less uncertainty to more uncertainty*") and intertemporal substitution ("I may want to shift consumption forward or backwards in time**"). In the very popular Constant Relative Risk ...

9

We can say more generally that lexical preferences are not representable using a continuous utility function. Lexical preferences are not continuous. Note the definition of a continuous preference relation. The preference relation $\succeq$ is continuous if for any sequences of consumption bundles $(x_{i})_{i \in \mathbb{N}}$ and $(y_{i})_{i \in \mathbb{N}}$...

9

Defn: A function $h:\mathbb{R}^2\rightarrow \mathbb{R}$ is homogenous of degree $k$ if for every nonzero $\alpha$, $h(\alpha x, \alpha y)=\alpha^k h(x,y)$. Defn: A function is homothetic if it is a monotonic transformation of a homogenous function. Lemma: If $f$ is homothetic, i.e. $f=g\circ u$ for some strictly increasing $g$ and homogenous $u$ then $$\... 8 As often with models embodying some form of "irrationality" (whatever that means), HD does a great job at matching a whole lot of behaviors, but leaves room for rather annoying Dutch Book situations (also know as "money pump" situations). These suggest that HD might generate some inaccurate predictions, and induce undesirable behaviors when included in ... 8 Are homothetic preferences strictly monotonically increasing? Homotheticity requires that$$ \alpha^\gamma U(x,y) = U(\alpha x, \alpha y) $$This is not defined over the "increasing" part of strictly monotonously increasing. Indeed, you can have decreasing preferences U(x,y) = -x -y for whom homotheticity holds. Are nomothetic preferences weakly ... 8 It's called a Principal-Agent Conflict. The RIAA/MPAA act as agents on behalf of the people who actually produce content (and consequently end-consumer value). To maintain relevance to their principals', the RIAA/MPAA must signal value to them (i.e. claim loudly and repeatedly that they do something good for them [regardless of the validity of that claim])... 8 As alluded to in the comments the distinction is roughly: Indifference: The decision maker knows she will receive the same utility from the consumption of x or y. Incompleteness: The DM does not know her preference between x and y. (Note, this could stem from a lack of information, or because no preference exists) So, from a conceptual vantage, the ... 7 The translog function can be used not only in preferences but also in production and cost functions. I am not very familiar with its implications in consumer theory, but from the production point of view, i've seen it widely used. The Translog Function doesn't impose additivity and homogeneity, and hence Constant Elasticity of Substitution. This is ... 7 A good cannot be inferior over the entire income range. The paper A Convenient Utility Function with Giffen Behaviour shows that for a person with utility of the form:$$U(x,y) = \alpha_1 \ln(x-\gamma_x)- \alpha_2 \ln(\gamma_y - y) $$X is inferior if \gamma_x and \gamma_y are positive, 0<\alpha_1<\alpha_2, and in the domain x>\gamma_x ... 7 Exogenous variables are believed to have some value given by nature. They are not caused by your theory's variables of interest. This is why they are said to be outside the model. Endogenous variables have values dependent on your theory's variables of interest. They both cause, and are caused by your topic. Example: In the study of wages, some ... 7 The indifference curves are constructed by viewing the utility function as an equation (for a fixed utility index value per curve). So from$$U = U(x_1,x_2)$$where the left side is just a symbol, we move to$$\bar U = U(x_1,x_2)$$where now the left side is a specific number. Take the total differential on both sides to obtain$$0 = U_1dx_1 + U_2dx_2 ...

7

Yes it is: If direction $$x \succ y \Rightarrow x \not \precsim y \Rightarrow u(x) > u(y).$$ Only if direction: For all $x, y \in X$, $$x \succsim y \iff u(x) \geq u(y)$$ implies $$x \sim y \iff u(x) = u(y).$$ Also $$u(x) > u(y) \Rightarrow u(x) \geq u(y) \Rightarrow x \succsim y ,$$  u(x) > u(y) \Rightarrow u(x) \not = u(y) \...

7

Looking more closely at your question, I think things should not be overly complicated. From Mas-Colell et.al. Definition 3.C.1: The preference relation $\succsim$ on X is continuous if it is preserved under limits. That is, for any sequence of pairs $\{(x^n, y^n)\}^\infty_{n=1}$ with $x^n \succsim y^n$ for all $n$, $x = \lim_{n \rightarrow \infty} x^n$, ...

7

Recall the definition: The function $u: X \rightarrow \mathbb{R}$ represents $\succeq$ on $X$ if for any $x,y \in X$, then $x \succeq y \iff u(x) \geq u(y)$ We can show that if $u: X \rightarrow \mathbb{R}$ represents $\succeq$ on $X$, then for any strictly increasing function, $f: \mathbb{R} \rightarrow \mathbb{R}$, the function $v(x) = f(u(x))$ also ...

7

Stigler and Becker's argument is methodological, not philosophical. They do not try to convince us that preferences are indeed identical across individuals and invariant across time as a matter of reality (the "Rocky Mountains" metaphor is an "as if " approach). Their point is that any outcome can be rationalized by assuming that "it was preferences that ...

7

The problem is that there are no indifference "curves" but indifference "areas". Consider the following graph: For a reference bundle $A$ (equivalent to $\{2,3\}$), the gray regions indicate the areas of indifference, based on your definition of preferences (the black lines are part of the indifference areas). Thus, by selecting any bundle, you can find ...

7

The easiest way to prove it is using the 'old' definition of continuity. $\succ$ is continuous iff whenever $x\succ y$, there exists neighborhoods of $x$ and $y$, $B_x, B_y$, such that all $z\in B(x)$ and $z'\in B(y)$, $z\succ z'$. Suppose $x\succ y$. Because $u$ represents $\succ$, $u(x)>u(y)$. Let $2\epsilon=u(x)-u(y)$. Because $u$ is continuous, ...

7

First of all, in order to provide a counterexample, you need to construct a utility function that is homogeneous of degree two, but is not homothetic. Therefore, the counterexample you gave in your solution doesn't work. To prove the statement directly, let $u(x)$ be a utility representation that is homogeneous of degree two. That is, $u(\alpha x)=\alpha^2 ... 6 That's interesting: the flavor of the frequentist approach to probability used for a socio-political fairness criterion: if my measure as a population group is$0<p<1$, and known, then my opinion should be accepted by the whole at the same measure, as number of issues goes to infinity. In other words, current observed acceptance rate should be a ... 6 This won't get at individual choice, but how about evolutionary approaches? Perhaps this isn't what you are looking for, but one way to model decisions is to wander from the rational paradigm entirely. All changes in behavior are driven by natural selection, and so an equilibrium is based on stability. In a symmetric normal form game, an evolutionarily ... 6 (I cannot say if my answer will respond to your questions, which indeed, are a bit unclear). If one browses through many-many economic papers, one will get the impression that "representative" just means identical. Indeed in large chunks of literature this is the case, for historical reasons. The drive behind the adoption of the "representative ... 6 I'm somewhat surprised that no one has linked to this paper: Backus, Routledge, and Zin (2004) Exotic Preferences for Macroeconomists (this version has some fixed typos, vs the NBER print). Their abstract is concise and extremely descriptive: We provide a user's guide to 'exotic' preferences: nonlinear time aggregators, departures from expected utility, ... 6 The simple answer is that they don't think they would make as much money. In many countries illegally downloading music or movies is getting harder and harder. The recording industry has achieved this by persuading governments to instruct the ISPs to block torrent sites, torrent proxy sites and sites that list proxy sites completely so no one can access ... 6 Consider the locations (1)$(0.000001,1)$and (2)$(0.0000005,10)$.$U\left(x_1,y_1\right) = 1.1$.$U\left(x_2,y_2\right) = 10.05$. However,$x_2 < x_1$, so this is not a lexicographic ordering. It is only with the additional constraint that the values of$x$and$y$be integers$\in[0,1000]$that the function you proposes has this attribute. Because real ... 6 The assumptions are different. First one states that if a bundle is better than the optimal one the consumer cannot afford it. The second one states that if a bundle is as good (not necessarily better) than the optimal one it has to cost as least as much, not less. Consider a space with just one type of good,$x$, and a utility function$U(x) = 0$. Let the ... 6 Is there any (economic) rational for the first-order expansion of the RHS? And for its different neighborhood evaluation? As for your first question: This is a purely mathematical tactic in order to obtain an (approximate) equation for$R$. The expansion of first order on the RHS is motivated by this fact, i.e. to bring$R$alone "in the surface". The ... 6 You implicitly assume that the utility of$n$units of$Y$equals$n$times the utility of 1 unit of$Y$, and there is no reason for that. For instance, if$Y$is a fridge, the gain in utility from having 1 fridge compared to 0 is certainly larger than the gain in utility from having 2 fridges compared to 1. The formula$U("nY")=n*U("Y")$that you use does ... 6 To begin with, I think the question is wrongly stated. For if the defininition of a thin indifference curve is such that continuity of a consumer's preferences implies thin indifference curves, then, surely, continuity implies thin indifference curves... This answers your question. However, if we are to make a suitable definition of a thin indifference ... 6 I don't think continuity alone is enough to guarantee thin indifference curves. Consider preferences such that, for any$x$and$y$in the choice set, the consumer is indifferent between$x$and$y\$. This seems like it must fit any definition of a thick indifference curve because the whole choice set lies on a single indifference curve! But these ...

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