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Advanced Microeconomics

Ordinal preference theory

Harald Wiese

University of Leipzig

Harald Wiese (University of Leipzig) Advanced Microeconomics 1 / 68


Part A. Basic decision and preference theory
1 Decisions in strategic (static) form
2 Decisions in extensive (dynamic) form
3 Ordinal preference theory
4 Decisions under risk

Harald Wiese (University of Leipzig) Advanced Microeconomics 2 / 68


Ordinal preference theory
Overview

1 The vector space of goods and its topology


2 Preference relations
3 Axioms: convexity, monotonicity, and continuity
4 Utility functions
5 Quasi-concave utility functions and convex preferences
6 Marginal rate of substitution

Harald Wiese (University of Leipzig) Advanced Microeconomics 3 / 68


The vector space of goods
Assumptions

households are the only decision makers;


nite number ` of goods dened by
place
time
contingencies
example: an apple of a certain weight and class to be delivered
in Leipzig
on April 1st, 2015,
if it does not rain the day before

Harald Wiese (University of Leipzig) Advanced Microeconomics 4 / 68


The vector space of goods
Exercise: Linear combination of vectors

Problem
Consider the vectors x = (x1 , x2 ) = (2, 4) and y = (y1 , y2 ) = (8, 12) .
Find x + y , 2x and 41 x + 34 y !

Harald Wiese (University of Leipzig) Advanced Microeconomics 5 / 68


The vector space of goods
Notation

For ` 2 N:

R` := f(x1 , ..., x` ) : xg 2 R, g = 1, ..., `g .

0 2 R` null vector (0, 0, ..., 0);


vectors are called points (in R` ).
Positive amounts of goods only:
n o
R`+ := x 2 R` : x 0

Vector comparisons:
x y : , xg yg for all g from f1, 2, ..., `g ;
x > y :, x y and x 6= y ;
x y :, xg > yg for all g from f1, 2, ..., `g .

Harald Wiese (University of Leipzig) Advanced Microeconomics 6 / 68


Distance between x and y

y euclidian
distance: c

city-block
c b
distance: a+b

x a infinity
distance: max(a, b)

Harald Wiese (University of Leipzig) Advanced Microeconomics 7 / 68


Distance

Denition
In R` :
q
euclidian (or 2-) norm: kx y k : = kx y k2 : = g` =1 (xg yg )2
innity norm: kx y k := maxg =1,...,` jxg yg j
`
city-block norm: kx y k1 : = g =1
jxg yg j

Harald Wiese (University of Leipzig) Advanced Microeconomics 8 / 68


Distance
Exercise

Problem
What is the distance (in R2 ) between (2, 5) and (7, 1) , measured by the
2-norm k k2 and by the ininity norm k k ?

Harald Wiese (University of Leipzig) Advanced Microeconomics 9 / 68


Distance and balls
Ball

Denition
Let x 2 R` and > 0. )
n o
x*
K = x 2 R` : k x x k<
x
(open) -ball with center x .

kx x k = holds for all x on the circular line;


K all the points within

Problem
Assuming the goods space R2+ , sketch three 1-balls with centers
(2, 2) , (0, 0) and (2, 0) , respectively.
Harald Wiese (University of Leipzig) Advanced Microeconomics 10 / 68
Distance and balls
Boundedness

Denition
A set M is bounded if there exists an -ball K such that M K.

Example
The set [0, ) = fx 2 R : x 0g is not bounded.

Harald Wiese (University of Leipzig) Advanced Microeconomics 11 / 68


Sequences and convergence
Sequence

Denition
A sequence x j j 2N
in R` is a function N ! R` .

Examples
In R: 1, 2, 3, 4, ... or x j := j;
In R2 :
(1, 2) , (2, 3) , (3, 4) , ...
1, 21 , 1, 13 , 1, 14 , 1, 15 , ... .

Harald Wiese (University of Leipzig) Advanced Microeconomics 12 / 68


Sequences and convergence
Convergence

Denition
x j j 2N in R` converges towards x 2 R` if for every > 0 there is an
N 2 N such that
x j x < for all j > N
holds.
Convergent a sequence that converges towards some x 2 R` .

Examples
1, 2, 3, 4, ... is not convergent towards any x 2 R;
1, 1, 1, 1, ... converges towards 1;
1, 12 , 13 , ... converges towards zero.

Harald Wiese (University of Leipzig) Advanced Microeconomics 13 / 68


Sequences and convergence
Lemma 1

Lemma
Let x j j 2N
be a sequence in R` .

If x j j 2N
converges towards x and y ) x = y .

xj j 2N
= x1j , ..., x`j converges towards (x1 , ..., x` ) i xgj
j 2N
converges towards xg for every g = 1, ..., `.

Problem
Convergent?
(1, 2) , (1, 3) , (1, 4) , ...
or
1 1 1 1
1, , 1, , 1, , 1, , ... .
2 3 4 5
Harald Wiese (University of Leipzig) Advanced Microeconomics 14 / 68
Boundary point

Denition
A point x 2 R` is a boundary x*
point of M R` i there is a
sequence of points in M and R2 \ M
M
another sequence of points in
R` nM so that both converge
towards x .

Harald Wiese (University of Leipzig) Advanced Microeconomics 15 / 68


Interior point

Denition
A point in M that is not a
boundary point is called an
interior point of M. x*
R2 \ M
M

Note: Instead of R` , we can consider alternative sets, for example R`+ .

Harald Wiese (University of Leipzig) Advanced Microeconomics 16 / 68


Closed set

Denition
A set M R` is closed i every converging sequence in M with
convergence point x 2 R` fullls x 2 M.

Problem
Are the sets
f0g [ (1, 2),
K = x 2 R` : k x x k< ,
K = x 2 R` : k x x k
closed?

Harald Wiese (University of Leipzig) Advanced Microeconomics 17 / 68


Preference relations
Overview

1 The vector space of goods and its topology


2 Preference relations
3 Axioms: convexity, monotonicity, and continuity
4 Utility functions
5 Quasi-concave utility functions and convex preferences
6 Marginal rate of substitution

Harald Wiese (University of Leipzig) Advanced Microeconomics 18 / 68


Relations and equivalence classes
Denition

Denition
Relations R (write xRy ) might be
complete (xRy or yRx for all x, y )
transitive (xRy and yRz implies xRz for all x, y , z)
reexive (xRx for all x);

Problem
For any two inhabitants from Leipzig, we ask whether one is the father of
the other. Fill in "yes" or "no":

property is the father of


reexive
transitive
complete
Harald Wiese (University of Leipzig) Advanced Microeconomics 19 / 68
Preference relations and indierence curves
Preference relation

Denition
(weak) preference relation - a relation on R`+ that is
complete (x - y or y - x for all x, y )
transitive (x - y and y - z implies x - z for all x, y , z) and
reexive (x - x for all x);
indierence relation:

x y :, x - y and y - x;

strict preference relation:

x y :, x - y and not y - x.

Harald Wiese (University of Leipzig) Advanced Microeconomics 20 / 68


Preference relations and indierence curves
Exercise

Problem
Fill in:
property indierence strict preference
reexive
transitive
complete

Harald Wiese (University of Leipzig) Advanced Microeconomics 21 / 68


Preference relations and indierence curves
transitivity of strict preference

We want to show
x y ^y z)x z
Proof: x y implies x - y , y z implies y - z.
Therefore, x y ^ y z implies x - z.
Assume z - x. Together with x y , transitivity implies z - y ,
contradicting y z. Therefore, we do not have z - x, but x z.

Harald Wiese (University of Leipzig) Advanced Microeconomics 22 / 68


Preference relations and indierence curves
Better and indierence set

Denition
Let % be a preference relation on R`+ . )
By := x 2 R`+ : x % y better set By of y ;
Wy : = x 2 R`+ :x -y worse set Wy of y ;
Iy := By \ Wy = x 2 R`+ :x y y s indierence set;
indierence curve the geometric locus of an indierence set.

Harald Wiese (University of Leipzig) Advanced Microeconomics 23 / 68


Preference relations and indierence curves
Indierence curve

numbers to indicate preferences:


x2 x2
6 3
3 6

x1 x1

Harald Wiese (University of Leipzig) Advanced Microeconomics 24 / 68


Indierence curves must not intersect

x2
Two dierent
C indierence curves,
Thus C B

A
But
B C A^A B)C B

Contradiction!

x1

Harald Wiese (University of Leipzig) Advanced Microeconomics 25 / 68


Preference relations and indierence curves
Exercise

Problem
Sketch indierence curves for a goods space with just 2 goods and,
alternatively,
good 2 is a bad,
good 1 represents red matches and good 2 blue matches,
good 1 stands for right shoes and good 2 for left shoes.

Harald Wiese (University of Leipzig) Advanced Microeconomics 26 / 68


Preference relations and indierence curves
Lexicographic preferences

In two-good case:

x -lex y :, x1 < y1 or (x1 = y1 and x2 y2 ).

Problem
What do the indierence curves for lexicographic preferences look like?

Harald Wiese (University of Leipzig) Advanced Microeconomics 27 / 68


Axioms: convexity, monotonicity, and continuity
Overview

1 The vector space of goods and its topology


2 Preference relations
3 Axioms: convexity, monotonicity, and continuity
4 Utility functions
5 Quasi-concave utility functions and convex preferences
6 Marginal rate of substitution

Harald Wiese (University of Leipzig) Advanced Microeconomics 28 / 68


Convex preferences
Convex combination

Denition
Let x and y be elements of R` . )

kx + (1 k ) y , k 2 [0, 1]

the convex combination of x and y .

Harald Wiese (University of Leipzig) Advanced Microeconomics 29 / 68


Convex preferences
Convex and strictly convex sets

y
interior M
M x point
M
y
c boundary
x point
not convex convex, strictly convex
but not strictly convex

Denition
A set M R` is convex if for any two points x and y from M, their
convex combination is also contained in M.
A set M is strictly convex if for any two points x and y from M, x 6= y ,

kx + (1 k ) y , k 2 (0, 1)

is an interior point of M for any k 2 (0, 1) .


Harald Wiese (University of Leipzig) Advanced Microeconomics 30 / 68
Convex preferences
Convex and concave preference relation

Denition
A preference relation % is
convex if all its better sets By are convex,
strictly convex if all its better sets By are strictly convex,
concave if all its worse sets Wy are convex,
strictly concave if all its worse sets Wy are strictly convex.

Preferences are dened on R`+ (!):


x2 x2

interior
better set point in R 2 interior
+
worse set point in R+2

x1
Harald Wiese (University of Leipzig) Advanced Microeconomics x1 31 / 68
Convex preferences
Exercise

Problem
Are these preferences convex or strictly convex?
x2 x2

better set better set

(a) x1 (b) x1

x2 x2

better set better set

(c) x1 (d) x1

Harald Wiese (University of Leipzig) Advanced Microeconomics 32 / 68


Monotonicity of preferences
Monotonicity

Denition
A preference relation % obeys:
weak monotonicity if x > y implies x % y ;
strict monotonicity if x > y implies x y;
local non-satiation at y if in every -ball with center y a bundle x
exists with x y .

Problem
Sketch the better set of y = (y1 , y2 ) in case of weak monotonicity!

Harald Wiese (University of Leipzig) Advanced Microeconomics 33 / 68


Exercise: Monotonicity and convexity

Which of the properties


(strict) monotonicity and/or
(strict) convexity
do the preferences depicted by the indierence curves in the graphs below
satisfy?
x2
x2 [1] [2]
6 6 3

x1
x1

x2 x2 [4]
[3]
3 6
6 3

x1
x1
Harald Wiese (University of Leipzig) Advanced Microeconomics 34 / 68
Monotonicity of preferences
Bliss point

x2

9
7
6
3

x1

Harald Wiese (University of Leipzig) Advanced Microeconomics 35 / 68


Continuous preferences

Denition
A preference relation - is continuous if for all y 2 R`+ the sets
n o
Wy = x 2 R`+ : x - y

and n o
By = x 2 R`+ : y - x

are closed.

Harald Wiese (University of Leipzig) Advanced Microeconomics 36 / 68


Lexicographic preferences are not continuous

Consider the sequence


1
xj j 2N
= 2+ ,2 ! (2, 2)
j
All its members belong to the better set of (2, 4) .
But (2, 2) does not.

x2

2 x1

Harald Wiese (University of Leipzig) Advanced Microeconomics 37 / 68


Utility functions
Overview

1 The vector space of goods and its topology


2 Preference relations
3 Axioms: convexity, monotonicity, and continuity
4 Utility functions
5 Quasi-concave utility functions and convex preferences
6 Marginal rate of substitution

Harald Wiese (University of Leipzig) Advanced Microeconomics 38 / 68


Utility functions
Denition

Denition
For an agent i 2 N with preference relation %i ,

U i : R`+ 7! R

utility function if

U i (x ) U i (y ) , x %i y , x, y 2 R`+

holds.
U i represents the preferences %i ;
ordinal utility theory.

Harald Wiese (University of Leipzig) Advanced Microeconomics 39 / 68


Utility functions
Examples of utility functions

Examples
Cobb-Douglas utility functions (weakly monotonic):

U (x1 , x2 ) = x1a x21 a


with 0 < a < 1;

perfect substitutes:

U (x1 , x2 ) = ax1 + bx2 with a > 0 and b > 0;

perfect complements:

U (x1 , x2 ) = min (ax1 , bx2 ) with a > 0 and b > 0.

Harald Wiese (University of Leipzig) Advanced Microeconomics 40 / 68


Utility functions
Dixit-Stiglitz preferences for love of variety

! 1
` 1
U (x1 , ..., x` ) = xj
with > 1
j =1
`
where X := j =1 xj implies

1 ! 1 1 ! 1
` `
X X X
1

X
1
U , ..., = =
` ` j =1 ` j =1 `
1 ! 1


1 1 1
1 1
= `X = ` 1 X = ` 1 X = ` 1 X
` `

U
and hence, by ` > 0, a love of variety.

Harald Wiese (University of Leipzig) Advanced Microeconomics 41 / 68


Utility functions
Exercises

Problem
Draw the indierence curve for perfect substitutes with a = 1, b = 4 and
the utility level 5!

Problem
Draw the indierence curve for perfect complements with a = 1, b = 4 (a
car with four wheels and one engine) and the utility level for 5 cars! Does
x1 denote the number of wheels or the number of engines?

Harald Wiese (University of Leipzig) Advanced Microeconomics 42 / 68


Equivalent utility functions

Denition (equivalent utility functions)


Two utility functions U and V are called equivalent if they represent the
same preferences.

Lemma (equivalent utility functions)


Two utility functions U and V are equivalent i there is a strictly
increasing function : R ! R such that V = U.

Problem
Which of the following utility functions represent the same preferences?
a) U1 (x1 , x2 , x3 ) = (x1 + 1) (x2 + 1) (x3 + 1)
b) U2 (x1 , x2 , x3 ) = ln (x1 + 1) + ln (x2 + 1) + ln (x3 + 1)
c) U3 (x1 , x2 , x3 ) = (x1 + 1) (x2 + 1) (x3 + 1)
d) U4 (x1 , x2 , x3 ) = [(x1 + 1) (x2 + 1) (x3 + 1)] 1
e) U5 (x1 , x2 , x3 ) = x1 x2 x3
Harald Wiese (University of Leipzig) Advanced Microeconomics 43 / 68
Existence
Existence is not guaranteed

Assume a utility function U for


lexicographic preferences:
x2
U (A0 ) < U (B 0 ) < U (A00 ) <
U (B 00 ) < U (A000 ) < U (B 000 ) ;
B' B'' B' ' '
within (U (A0 ) , U (B 0 )) at least
one rational number (q 0 ) etc.
q 0 < q 00 < q 000 ; A' A' ' A' ' '

injective function
f : [r 0 , r 000 ] ! Q;
r' r' ' r' ' ' x1
not enough rational numbers;
contradiction > no utility
function for lexicographic
preferences

Harald Wiese (University of Leipzig) Advanced Microeconomics 44 / 68


Existence
Existence of a utility function for continuous preferences

Theorem Wait a second for the


denition of a continuous
If the preference relation -i of an agent i
function, please!
is continuous, there is a continuous utility
function U i that represents -i .

x2

(x1, x 2 )
(x1 ,x 2 )

U (x ) := x1 x1

Harald Wiese (University of Leipzig) Advanced Microeconomics 45 / 68


Existence
Exercise

Problem
Assume a utility function U that represents the preference relation - .
Can you express weak monotonicity, strict monotonicity and local
non-satiation of - through U rather than -?

Harald Wiese (University of Leipzig) Advanced Microeconomics 46 / 68


Continuous functions
Denition

Denition f (x )
f : R` ! R is
continuous at x 2 R` i
for every x j j 2N in R` f (x)
that converges towards
x, f x j j 2N
converges towards f (x ).

x x

Fix x 2 R` .
Consider sequences in the domain x j j 2N that converge towards x.
Convergence of sequences in the range f x j j 2N towards f (x ) > f
continuous at x
No convergence or convergence towards y 6= f (x ) > no continuity
Harald Wiese (University of Leipzig) Advanced Microeconomics 47 / 68
Continuous functions
Counterexample

f (x)

f (x)

excluded

x x

Specic sequence in the domain x j j 2N that converges towards x


but sequence in the range f x j j 2N does not converge towards f (x )
Harald Wiese (University of Leipzig) Advanced Microeconomics 48 / 68
Quasi-concave utility functions and convex preferences
Overview

1 The vector space of goods and its topology


2 Preference relations
3 Axioms: convexity, monotonicity, and continuity
4 Utility functions
5 Quasi-concave utility functions and convex preferences
6 Marginal rate of substitution

Harald Wiese (University of Leipzig) Advanced Microeconomics 49 / 68


Quasi-concavity

Denition
f : R` ! R is quasi-concave if

f (kx + (1 k) y) min (f (x ) , f (y ))

holds for all x, y 2 R` and all k 2 [0, 1] .


f is strictly quasi-concave if

f (kx + (1 k ) y ) > min (f (x ) , f (y ))

holds for all x, y 2 R` with x 6= y and all k 2 (0, 1) .

Note: quasi-concave functions need not be concave (to be introduced


later).

Harald Wiese (University of Leipzig) Advanced Microeconomics 50 / 68


Quasi-concavity
Examples

Also
f (x ) quasi-concave:

f (kx + (1 k )y )
f (y )

x kx + (1 k )y y x

Example
Every monotonically increasing or decreasing function f : R ! R is
quasi-concave.
Harald Wiese (University of Leipzig) Advanced Microeconomics 51 / 68
Quasi-concavity
A counter example

f (x )

f (y )

f (kx + (1 k )y )

x kx + (1 k )y y x

Harald Wiese (University of Leipzig) Advanced Microeconomics 52 / 68


Better and worse sets, indierence sets

Denition
Let U be a utility function on R`+ .
BU (y ) := By = x 2 R`+ : U (x ) U (y ) the better set By of y ;
W U ( y ) : = Wy = x 2 R`+ : U (x ) U (y ) the worse set Wy of y ;
IU (y ) := Iy = By \ Wy = x 2 R`+ : U (x ) = U (y ) y s
indierence set (indierence curve) Iy .

Harald Wiese (University of Leipzig) Advanced Microeconomics 53 / 68


Concave indierence curve

Denition
Let U be a utility function on R`+ .
Iy is concave if U (x ) = U (y ) implies

U (kx + (1 k) y) U (x )

for all x, y 2 R`+ and all k 2 [0, 1] .


Iy is strictly concave if U (x ) = U (y ) implies

U (kx + (1 k ) y ) > U (x )

for all x, y 2 R`+ with x 6= y and all k 2 (0, 1) .

Harald Wiese (University of Leipzig) Advanced Microeconomics 54 / 68


Concave indierence curve
Examples and counter examples

x x
kx + (1 k )y

y y

(a) (b)

x
x
y
y

(c) (d)
Harald Wiese (University of Leipzig) Advanced Microeconomics 55 / 68
Lemma

Lemma
Let U be a continuous utility function on R`+ . A preference relation % is
convex i:
all the indierence curves are concave, or
U is quasi-concave.

U s better U strictly U quasi- U s better


sets strictly quasi-concave concave sets convex
convex
c c
U s better U s indifference U s indifference
sets strictly curves strictly curves concave
convex and concave
local
nonsatiation
Harald Wiese (University of Leipzig) Advanced Microeconomics 56 / 68
Marginal rate of substitution
Overview

1 The vector space of goods and its topology


2 Preference relations
3 Axioms: convexity, monotonicity, and continuity
4 Utility functions
5 Quasi-concave utility functions and convex preferences
6 Marginal rate of substitution

Harald Wiese (University of Leipzig) Advanced Microeconomics 57 / 68


Marginal rate of substitution
Mathematics: Dierentiable functions

Denition
Let f : M ! R be a real-valued function with open domain M R` .
f is dierentiable if all the partial derivatives

f
fi ( x ) : = (i = 1, ..., `)
xi
exist and are continuous.
0 1
f1 ( x )
B f2 ( x ) C
f 0 (x ) : = B
@ ...
C
A
f` (x )

f s derivative at x.

Harald Wiese (University of Leipzig) Advanced Microeconomics 58 / 68


Marginal rate of substitution
Mathematics: Adding rule

Theorem
Let f : R` ! R be a dierentiable function and let g1 , ..., g` be
dierentiable functions R ! R. Let F : R ! R be dened by

F (x ) = f (g1 (x ) , ..., g` (x )) .

)
`
dF f dgi
= .
dx i =1 gi dx

Harald Wiese (University of Leipzig) Advanced Microeconomics 59 / 68


Marginal rate of substitution
Economics

x2

x2
(y1 , y 2 )
y2

x1 y1 x1

Iy = (x1 , x2 ) 2 R2+ : (x1 , x2 ) (y1 , y2 ) .


Iy : x1 7! x2 .

Harald Wiese (University of Leipzig) Advanced Microeconomics 60 / 68


Marginal rate of substitution
Denition and exercises

Denition
If the function Iy is dierentiable and if preferences are monotonic,

dIy (x1 )
dx1

the MRS between good 1 and good 2 (or of good 2 for good 1).

Problem
What happens if good 2 is a bad?

Harald Wiese (University of Leipzig) Advanced Microeconomics 61 / 68


Marginal rate of substitution
Perfect substitutes

Problem
Calculate the MRS for perfect substitutes (U (x1 , x2 ) = ax1 + bx2 with
a > 0 and b > 0.)!

Solve ax1 + bx2 = k for x2 !


Form the derivative of x2 with respect to x1 !
Take the absolute value!

Harald Wiese (University of Leipzig) Advanced Microeconomics 62 / 68


Marginal rate of substitution
Lemma 1

Lemma
Let % be a preference relation on R`+ and let U be the corresponding
utility function.

If U is dierentiable, the MRS is dened by:


U
dIy (x1 ) x1
MRS (x1 ) = = .
dx1 U
x2

U U
x1 , x2 marginal utility.

Harald Wiese (University of Leipzig) Advanced Microeconomics 63 / 68


Marginal rate of substitution
Lemma: proof

Proof.
U (x1 , Iy (x1 )) constant along indierence curve;
dierentiating U (x1 , Iy (x1 )) with respect to x1 (adding rule):

U U dIy (x1 )
0= + .
x1 x2 dx1
dIy (x1 )
dx1 can be found even if Iy were not given explicitly
(implicit-function theorem).

Problem
Again: What is the MRS in case of perfect substitutes?

Harald Wiese (University of Leipzig) Advanced Microeconomics 64 / 68


Marginal rate of substitution
Lemma 2

Lemma
Let U be a dierentiable utility function and Iy an indierence curve of U.
Iy is concave i the MRS is a decreasing function in x1 .

x2
x1 < y1 ;
MRS (x1 ) > MRS (y1 ).

x1 y1 x1

Harald Wiese (University of Leipzig) Advanced Microeconomics 65 / 68


Marginal rate of substitution
Cobb-Douglas utility function

U (x1 , x2 ) = x1a x21 a


,0 < a < 1

ax1a 1 x21 a
U
x1 a x2
MRS = = a = .
U
x2
(1 a) x1a x2 1 a x1

Cobb-Douglas preferences are monotonic so that an increase of x1 is


associated with a decrease of x2 along an indierence curve.
Therefore, Cobb-Douglas preferences are convex (Cobb-Douglas
utility functions are quasi-concave).

Harald Wiese (University of Leipzig) Advanced Microeconomics 66 / 68


Further exercises

Problem 1
Dene strict anti-monotonicity. Sketch indierence curves for each of the
four cases:
strict monotonicity strict anti-monotonicity
strict convexity
strict concavity

Problem 2
(Strictly) monotonic, (strictly) convex or continuous?
(a) U (x1 , x2 ) = x1 x2 ,
(b) U (x1 , x2 ) = min fa x1 , b x2 g where a, b > 0 holds,
(c) U (x1 , x2 ) = a x1 + b x2 where a, b > 0 holds,
(d) lexicographic preferences

Harald Wiese (University of Leipzig) Advanced Microeconomics 67 / 68


Further exercises

Problem 3 (di cult)


Let U be a continuous utility function representing the preference relation
- on Rl+ . Show that - is continuous as well. Also, give an example for a
continuous preference relation that is represented by a discontinuous utility
function. Hint: Dene a function U 0 that diers from U for x = 0, only

Harald Wiese (University of Leipzig) Advanced Microeconomics 68 / 68

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