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Chapter 3 7
Chapter 3
Preferences
This chapter is more abstract and therefore needs somewhat more motivation
than the previous chapters. It might be a good idea to talk about relations in
general before introducing the particular idea of preference relations. Try the
relations of “taller,” and “heavier,” and “taller and heavier.” Point out that
“taller and heavier” isn’t a complete relation, while the other two are. This
general discussion can motivate the general idea of preference relations.
Make sure that the students learn the specific examples of preferences such
as perfect substitutes, perfect complements, etc. They will use these examples
many, many times in the next few weeks!
When describing the ideas of perfect substitutes, emphasize that the defining
characteristic is that the slope of the indifference curves is constant, not that it
is −1. In the text, I always stick with the case where the slope is −1, but in
the workbook, we often treat the general case. The same warning goes with the
perfect complements case. I work out the symmetric case in the text and try to
get the students to do the asymmetric case in the workbook.
The definition of the marginal rate of substitution is fraught with “sign
confusion.” Should the MRS be defined as a negative or a positive number? I’ve
chosen to give the MRS its natural sign in the book, but I warn the students that
many economists tend to speak of the MRS in terms of absolute value. Example:
diminishing marginal rate of substitution refers to a situation where the absolute
value of the MRS decreases as we move along an indifference curve. The actual
value of the MRS (a negative number) is increasing in this movement!
Students often begin to have problems with the workbook exercises here.
The first confusion they have is that they get mixed up about the idea that
indifference curves measure the directions where preferences are constant, and
instead draw lines that indicate the directions that preferences are increasing.
The second problem that they have is in knowing when to draw just arbitrary
curves that qualitatively depict some behavior or other, and when to draw exact
shapes.
Try asking your students to draw their indifference curves between five dollar
bills and one dollar bills. Offer to trade with them based on what they draw. In
addition to getting them to think, this is a good way to supplement your faculty
salary.
8Chapter Highlights
Preferences
A. Preferences are relationships between bundles.
1. if a consumer would choose bundle (x1,x
2)when(y1,y
2) is available, then
it is natural to say that bundle (x1,x
2) is preferred to (y1,y
2)bythis
consumer.
B. Notation
1. (x1,x
2)(y1,y
2) means the x-bundle is strictly preferred to the y-
bundle
C. Assumptions about preferences
1. complete — any two bundles can be compared
D. Indifference curves
1. graph the set of bundles that are indifferent to some bundle. See Figure
3.1.
E. Examples of preferences
1. perfect substitutes. Figure 3.3.
2. perfect complements. Figure 3.4.
3. bads. Figure 3.5.
F. Well-behaved preferences
1. monotonicity — more of either good is better
2. convexity — averages are preferred to extremes. Figure 3.10.
G. Marginal rate of substitution
1. slope of the indifference curve
3. sign problem — natural sign is negative, since indifference curves will
generally have negative slope
Chapter 3 9
5. measures marginal willingness to pay (give up)
