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# Economics 401

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.
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
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

## Then if  is continuous x  y. Use the following counterexample to show that  is not

continuous.
xn = (1/n, 0) , x = (0, 0) , yn = (0, 1) , y = (0, 1)
Here
xn  yn , for all n
But
y  x.
3. Use mathematical notation to define the weak axiom of revealed preference. State
whether or not each of the following choice structures satisfies WARP and defend your
(a) X = {a, b, c},B = {B1 , B2 , B3 } , B1 = {a, b} , B2 = {b, c} , B3 = {c, a} , C (B1 ) =
{a} , C (B2 ) = {b} , C (B3 ) = {c};
(b) X = {a, b, c},B = {B1 , B2 } , B1 = {a, b} , B2 = {a, b, c} , C (B1 ) = {a} , C (B2 ) = {c};
2

## (c) X = {a, b, c, d},B = {B1 , B2 } , B1 = {a, b, c} , B2 = {a, b, d} , C (B1 ) = {a, c} , C (B2 ) =

{a, d};
WARP holds in some choice structure (B, C ()) if:
Assume B1 , B2 B, {a, b} B1 B2 ; a C (B1 ) and b C (B2 ) a C (B2 ).
It follows from this definition that WARP has no leverage unless our observations give us
at least two budget sets with two elements in common say a and b AND a is amongst
the best elements in one budget set and b is amongst the best elements in the other budget
set.
These assumptions are not met in any of the cases above so WARP is trivially satisfied.
4. MWG, 1.B.3
Given that u : X < represents % on X we know:
for all x, y X, x % y if and only if u (x) u (y) .
To complete the proof note that if f () is a strictly increasing function defined on the
real numbers then
for all x, y X, x % y if and only if u (x) u (y) if and only if f (u (x)) f (u (y))
5. MWG, 1.B.4