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Pioblem 1: Axioms on piefeiences
!
!
! !
!
, !
!
! !
!

By uefinition, !
!
! !
!
means !
!
! !
!
but not !
!
! !
!

So, !
!
! !
!
! !
!

By tiansitivity, this means !
!
! !
!

Now, suppose insteau we have !
!
! !
!
. Since !
!
! !
!
, by tiansitivity !
!
! !
!

But theie is a contiauiction heie because we know that !
!
! !
!

So, we have shown that by tiansitivity !
!
! !
!
is tiue, anu by contiauiction
!
!
! !
!
cannot holu.
Theiefoie, we concluue !
!
! !
!

Pioblem 2: 0tility Functions
1. The binaiy ielation ! on the consumption set X is calleu a piefeience
ielation if it satisfies Axioms 1 anu 2.

Axiom 1 Completeness: Foi all !
!
anu !
!
in X, eithei !
!
! !
!
oi !
!
! !
!
.

a. Since bunule !
!
is bettei than !
!
whenevei !
!
! !
! !
! !
!
!
!
! !
, it is possible to uesciibe all the ielationships between
bunules. This satisfies axiom 1.
Axiom 2 Tiansitivity: Foi any thiee elements !
!
, !
!
anu !
!
in X, if !
!
! !
!

anu !
!
! !
!
, then !
!
! !
!
.
a. Suppose theie was a thiiu bunule !
!
, given !
!
is bettei than !
!

whenevei !
!
! !
! !
! !
!
! !
! !
, by tiansitivity this means that
!
!
! !
!
if !
!
! !
! !
! !
!
! !
! !
. Theiefoie tiansitivity is
satisfieu.
Thus, ! iepiesents piefeience ielations.
2. Axiom S Continuity: Foi all ! ! !
!
!
, the 'at least as goou as' set, ! !!!,
anu the 'no bettei than' set, ! !!!, aie closeu in !
!
!
.

Axiom 4 Stiict Nonotonicity: Foi all !
!
! !
!
! !
!
!
, if !
!
! !
!
, then !
!
! !
!
,
while if !
!
! !
!
, then !
!
! !
!
.

a. Foi Axiom S,

! !
!
! !!
!
! !!!
!
! !
!
! when !
!
! !
! !
! !
!
! !
! !

! !
!
! !!
!
! !!!
!
! !
!
! when !
!
! !
! !
! !
!
! !
! !

This ieaus as; the uppei contoui set (!
!
) that is weakly piefeiieu
to set !
!
is closeu when !
!
! !
! !
! !
!
! !
! !
is satisfieu, anu
the lowei contoui set (!
!
) that is no bettei than to set !
!
is closeu
when !
!
! !
! !
! !
!
! !
! !
is satisfieu. Baseu on this uefinition,
the continuity axiom is met.

b. Foi Axiom 4,

given ! ! !!!!! anu that bunule !
!
is weakly piefeiieu to !
!

whenevei !
!
! !
! !
! !
!
! !
! !
, if !
!
contains u.7 units anu !
!

contains u.6 units, !
!
! !
!
, uespite !
!
> !
!
. So in this case,
monotonicity is not satisfieu since moie is not necessaiily bettei.

Foi axiom 4 to be satisfieu, the set must be iestiicteu to the iegion
! ! !!!!!!!, so that the moie of one bunule (e.g. !
!
! !
!
)
necessitates in the piefeience of !
!
! !
!
.

S. Theoiem 1.1: If the binaiy ielation ! is complete, tiansitive, continuous,
anu stiictly monotonic, theie exists a continuous ieal-valueu function,
!! !
!
!
! !, which iepiesents !.

a. Fiom pait 2.2, it has been establisheu that ovei the iegion
! ! !!!!!, axiom 4 is violateu. Bowevei, theoiem 1.1 only states
sufficient conuitions foi the existence of a !, which uoes not
necessaiily mean that the theoiem uoes not still allow foi a ! to
exist.

4. In pioving theoiem 1.1, sets A anu B aie uefineu as:

! ! ! ! ! !" ! ! ! ! !! ! !!!" ! !!

wheie ! ! !!!, anu !
!
! ! ! ! will uefine ! ! !!! when ! ! ! !
!
such
that ! ! !!!!!, anu !
!
! !
!
whenevei !
!
! !
! !
! !
!
! !
! !
.

The pioof fails in ueteimining the uniqueness of ! ! . Suppose theie is
only one numbei such that !
!
!!!!!
!
!, by tiansitivity this means !
!
!!!
!
!.
But it is no longei tiue that holus when stiict monotonicity is violateu
because !
!
! !
!
! !
!
! !
!
anu !
!
! !
!
all can iepiesent !
!
!!!
!
!.

S. Fiom pait 2.4, a utility function can be pioven to exist.

In the iegion of ! ! !!!!!, since stiict monotonicity is violateu, set A is tiue
when ! ! ! is in the inteival of !!!!!!! anu when ! ! ! is in the inteival of
!!!!!!!.

Similaily foi set B, it is tiue when ! ! ! in the inteival of !!!!!!! anu when
! ! ! is in the inteival of !!!!!!!, with all sets closeu given the assumption
of continuity.

Suppose theie is a ! that uoesn't exist in the set of A anu B. Fiom
completeness, it must be the case that eithei !" ! ! oi !" ! !. But this
must mean that ! ! ! ! ! foi eithei case to holu. Thus, by pioof of
contiauiction, theie is at least one !
!
that iepiesents ! ! .