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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.
ANSWER
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
preference relation complete, transitive and continuous? Defend your answers carefully.
ANSWER
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
answers.
(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};
ANSWER
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
ANSWER
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
ANSWER
Proof: Denote
() for all x, y X, x y if and only if u (x) = u (y)
() for all x, y X, x  y if and only if u (x) > u (y)
Given that () and () are true we need to prove the definition in MWG 1.B.3 holds.
Note that x % y implies either x  y in which case u (x) > u (y) or x y in which case
u (x) = u (y); combining the two options then x % y implies u (x) u (y). Conversely,
u (x) u (y) implies either u (x) > u (y) in which case x  y or u (x) = u (y) in which case
x y. So combining the two options then u (x) u (y) implies x % y.