Prof.

Ignacio Monzón
Collegio Carlo Alberto
Fall 2021

M ICROECONOMIC T HEORY - PS #1 - A NSWER K EY

Due date: Monday, October 4th

1. MWG 1.C.2B Show that the weak axiom (Definition 1.C.1) is equivalent to the fol-
lowing property holding:
Suppose that B, B0 ∈ B, that x, y ∈ B, and that x, y ∈ B0 . Then if x ∈ C ( B) and
y ∈ C ( B0 ), we must have { x, y} ⊂ C ( B) and { x, y} ⊂ C ( B0 ).
Answer: This exercise provides an alternative expression for the weak axiom of
revealed preference. Let us denote this new property WARP*, and let us show that
WARP* ⇐⇒ WARP, where WARP is the usual weak axiom of revealed preference.
First, note that the assumptions of WARP are the same as the assumptions for
WARP*. In both cases we require that B, B0 ∈ B, that x, y ∈ B, that x, y ∈ B0
and that x ∈ C ( B) and y ∈ C ( B0 ). WARP states that as a result x ∈ C ( B0 ), whereas
WARP* states as a result that { x, y} ⊂ C ( B) and { x, y} ⊂ C ( B0 ).
Then, WARP* seems more restrictive than WARP. It is easy to see that if WARP*
holds, then WARP holds too: { x, y} ⊂ C ( B0 ) ⇒ x ∈ C ( B0 ).
As a result, we are only left to show that if WARP holds, then WARP* has to hold
too. If WARP holds, then we know that x ∈ C ( B), y ∈ C ( B0 ) and x ∈ C ( B0 ). Then,
we only need to show that also y ∈ C ( B). To do so, just apply WARP one more time:
Since B, B0 ∈ B, that x, y ∈ B, that x, y ∈ B0 and that x ∈ C ( B) and y ∈ C ( B0 ),
WARP guarantees y ∈ C ( B).

1
2. Problem 1 from Rubinstein. (Easy) Let < be a preference relation on a set X. De-
fine I ( x ) to be the set of all y ∈ X for which y ∼ x. Show that the set (of sets!)
{ I ( x ) | x ∈ X } is a partition of X, i.e.,
I (y) = ∅
T
(a) For all x and y, either I ( x ) = I (y) or I ( x )
(b) For every x ∈ X, there is y ∈ X such that x ∈ I (y).

Answer: Let us show first part (a).

Because of completeness, then for any x, y ∈ X, either x < y, or y < x, or both.
(Note that this can be written as follows: “Because of completeness, then either 1)
x < y and y 6< x, or 2) y < x and x 6< y, or 3) both x < y and y < x”). In the third
case, x ∼ y. Let us focus on that case first and show that if x ∼ y, then I ( x ) = I (y).
To show that I ( x ) = I (y), we need to show two things:

z ∈ I ( x ) ⇒ z ∈ I (y) and z ∈ I (y) ⇒ z ∈ I ( x )

If z ∈ I ( x ), then z ∼ x. We also know that x ∼ y. Then, by transitivity of ∼, z ∼ y.

Then, z ∈ I (y). The argument in the other direction is exactly the same.
Now, let us go back to the other two cases (that is, 1) x < y and y 6< x, or 2) y < x
and x 6< y). In those cases, x 6∼ y. We show then, that I ( x ) I (y) = ∅.
T

We do so by contradiction. If I ( x ) I (y) 6= ∅, then there exists z ∈ X such that

T

z ∈ I ( x ) and z ∈ I (y). Then, by the definition of I (·), z ∼ x and z ∼ y. If so,

by transitivity of ∼, x ∼ y. But we know that is false. So we have arrived to the
contradiction we were looking for.
Let us continue with part (b).
By completeness, for any x, y ∈ X, either x < y, or y < x, or both. In particular, the
statement holds for x, x ∈ X. That is, either x < x, or x < x, or both. So both x < x
and x < x. So x ∼ x. As a result, x ∈ I ( x ).

2
3. (The Condorcet Paradox) Transitivity is a nice property of individual preferences.
Now, what about the aggregation of preferences? Say that a society chooses based
on majority voting. There are three options in society: X = { x, y, z}. You can think
about these three options as three possible candidates for office. Moreover, there are
three individuals in society, agents 1, 2 and 3, with preferences as follows:

x 1 y and y 1 z
z 2 x and x 2 y
y 3 z and z 3 x

Since society chooses based on voting, let x S y if at least two out of the three
citizens prefer x over y.
Find S for all combinations. Are preferences S transitive? Why?
Answer: We need to compare all possible combinations of options.
First, let us compare options x and y. In such a case, agents 1 and 2 vote for x. Then,
x S y.
Next, let us compare options x and z. In such a case, agents 2 and 3 vote for z. Then,
z S x.
Finally, let us compare options y and z. In such a case, agents 1 and 3 vote for x.
Then, y S z.
We can see that preferences S are not transitive. The aggregation of preferences
through voting does not work well.

3
4. (Loosely based on Rubinstein & Kreps) Recall that the strict preference relation  is
defined as follows:
x  y ⇐⇒ x < y and y 6< x
Show that

(a)  is asymmetric: There are no x, y ∈ X such that x  y and y  x.

Answer: Assume there are x, y ∈ X with x  y and y  x. Then, by the
definition of the strict preference relation,

x  y ⇐⇒ x < y and y 6< x

y  x ⇐⇒ y < x and x 6< y

So we have reached a contradiction.

(b)  is negatively transitive: For all x, y, z ∈ X, if x  y, then either x  z or z  y
or both.
Answer: Again, assume there are x, y, z ∈ X with x  y. Moreover, assume
that x 6 z and z 6 y. Then, by the definition of the strict preference relation,

x  y ⇐⇒ x < y and y 6< x

x 6 z ⇐⇒ not ( x < z and z 6< x ) ⇐⇒ x 6< z or z < x or both ⇒ z < x
z 6 y ⇐⇒ not (z < y and y 6< z) ⇐⇒ z 6< y or y < z or both ⇒ y < z

Note the last consequence holds because of completeness. Now, since y < z
and z < x, then y < x, by transitivity. So we have reached a contradiction.

4
5. Suppose that < is a complete and transitive preference relation on some finite choice
set X. Define a new binary relation “way better than” as x ∗ y (“x is way better
than y”) if there exists z ∈ X such that x  z and z  y. Define a corresponding
weak preference relation by x <∗ y (“x is weakly way better than y”) if y is not way
better than x. Is <∗ complete? Is it transitive? Explain.
Answer:
Assume that the relation <∗ is not complete. Then, there exist x, y ∈ X such that
x 6<∗ y and y 6<∗ x. Then, by the definition of <∗ , x ∗ y and y ∗ x. So there exist
z1 , z2 ∈ X such that x  z1  y and y  z2  x. By transitivity of , y  y, which is
a contradiction.
The relation <∗ is not transitive, as the following counterexample shows. Let X =
{ x1 , x2 , x3 } with x1  x2  x3 . Then, x1 ∗ x3 and x3 6∗ x1 . Next, x1 6∗ x2 and
x2 6∗ x1 . Finally, x2 6∗ x3 and x3 6∗ x2 . Then, x3 <∗ x2 <∗ x1 but x3 6<∗ x1 .