Preferences II

ECON201- MICROECONOMICS
SPRING 2023
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Consumer Theory
• We consider a rational consumer.
• We address the following two questions:
• Which combinations of goods is the consumer able to buy?
• Among the combinations of goods that the consumer is able to buy, which
combination(s) does the consumer prefers to buy?

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Monotonic Preferences
• Monotonicity: More of any commodity is always preferred (i.e., no
satiation and every commodity is a good).

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Monotonicity and Indifference Curves
• If more of a commodity is always preferred to less, then the
commodity is a “good.”
• If less of a commodity is always preferred, then the commodity is a
“bad.”

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Monotonic Indifference Curves

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Non-Monotonic Indifference Curves

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Preferences Exhibiting Satiation
• Another example of non-monotonic preferences.
• For some goods there is a perfect optimal point
• Varian: “pepperoni on pizza”
• Sugar in cake, milk in coffee, etc.
• There might be a bundle that is the perfect optimal
• A bundle strictly preferred to any other is a “satiation point” or a
“bliss point.”

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Indifference Curves Exhibiting Satiation

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Indifference Curves Exhibiting Satiation

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Convex Preferences
• Convexity: Mixtures of bundles are (at least weakly) preferred to the
bundles themselves.

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Convex Preferences
• Convexity: Mixtures of bundles are (at least weakly) preferred to the
bundles themselves.
• Example: Suppose you are indifferent between x and y.
• The 50-50 mixture of the bundles x and y is z=0.5x+0.5y.
• Convexity means that your weakly prefer z to either x or y, i.e., z ≿ x and z ≿
y.

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Convex Preferences
• Convexity: Mixtures of bundles are (at least weakly) preferred to the
bundles themselves.
• Example: Suppose you are indifferent between x and y.
• The 50-50 mixture of the bundles x and y is z=0.5x+0.5y.
• Convexity means that your weakly prefer z to either x or y, i.e., z ≿ x and z ≿
y.
• What does a mixture mean?

⍺x+(1-⍺)y=(⍺x1+(1-⍺)y1, ⍺x2+(1-⍺)y2), where 0≤⍺≤1

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Convex Preferences
• Weakly Convex: If x is indifferent to y, then any mixture of x and y is
weakly preferred to either:

x ~ y implies ⍺x+(1-⍺)y ≿ x.

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Convex Preferences
• Weakly Convex: If x is indifferent to y, then any mixture of x and y is
weakly preferred to either:

x ~ y implies ⍺x+(1-⍺)y ≿ x.

• Strictly Convex: If x is indifferent to y, then any mixture of x and y is

x ~ y implies ⍺x+(1-⍺)y ≻ x.

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Does convexity assumption make sense?

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Does convexity assumption make sense?
• Pickles and ice cream?

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Does convexity assumption make sense?
• Pickles and ice cream?
• Studying Econ 201 and watching Breaking Bad?

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Does convexity assumption make sense?
• Pickles and ice cream?
• Studying Econ 201 and watching Breaking Bad?
• What is the implication of convexity on the shape of indifference
curves?

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Convex Preferences

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Convex Preferences

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Non-Convex Preferences

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Convex Preferences

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Some types of preferences
1. Perfect complements
2. Perfect substitutes

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Extreme Cases: Perfect Substitutes
• If a consumer always regards units of commodities 1 and 2 as
equivalent, then the commodities are “perfect substitutes” and
only the total amount of the two commodities in bundles
determines their preference rank-order.
• Examples:
• Different types of oranges?

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Extreme Cases: Perfect Substitutes

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Extreme Cases: Perfect Complements
• If a consumer always consumes commodities 1 and 2 in fixed
proportion (e.g., one-to-one), then the commodities are “perfect
complements”.
• Only the number of pairs of units of the two commodities
determines the preference rank-order of bundles.
• Examples:
• Right and left shoes?
• Car and tires?

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Extreme Cases: Perfect Complements

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Well-Behaved Preferences
• A preference relation is “well-behaved” if it is both:
• Monotonic
• Convex

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Slopes of Indifference Curves
• The slope of an indifference curve is its “marginal rate of
substitution” (MRS).
Ø How can a MRS be calculated?

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Marginal Rate of Substitution

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Marginal Rate of Substitution

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MRS and Indifference Curve Properties

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MRS and Indifference Curve Properties

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Remarks
• Consider your preferences over cars. Can you describe them using
the preference relation ≿ ?
• Review partial derivatives and total differentiation before next
lecture!

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