ECON5210 Lecture 1: Preference, Choice and Utility

Rui Tang, HKUST

Email: ruitang@ust.hk
Office hour: Tuesday 4-5 p.m.
Roadmap

What is a preference? What (basic) properties should a preference satisfy?

If a decision maker has a preference and always chooses her favorite option,
what properties should her choice behavioral exhibit?
When can a preference be represented by a utility function?
Reference: MWG Chapter 1

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Binary Relation and Preference Relation

Let X be a nonempty set of alternatives.

For example, X = {apple, orange, banana, ...}, the set of fruits.

A binary relation over X is a subset R ⊆ X × X . Write xRy if (x, y ) ∈ R.

A binary relation is reflexive if xRx for all x ∈ X .
A binary relation is complete if for any x, y ∈ X , either xRy or yRx.
A binary relation is transitive if xRy and yRz imply xRz.
Remark: a complete binary relation must be reflexive.

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Binary Relation and Preference Relation

Definition
A preference relation is a complete and transitive binary relation.

Completeness: every pair of alternatives is comparable.

Transitivity: if the decision maker prefers apple to orange and prefers orange
to banana, then she prefers apple to banana.

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Binary Relation and Preference Relation

As is standard in the literature, we use % to denote a preference relation

instead of R, e.g., we write x % y .
x % y is usually read as: x is weakly preferred to y , which means:
either x is strictly preferred to y , or
x is as good as y .

We can define the strict part and indifference part of %:

x  y if x % y and y 6% x: x is strictly preferred to y ;
x ∼ y if x % y and y % x: x and y are indifferent.

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Properties of  and ∼

A binary relation R is irreflexive if xRx never holds.

A binary relation R is symmetric if xRy implies yRx.
A binary relation R is asymmetric if xRy and yRx cannot hold
simultaneously.
A binary relation R is antisymmetric if xRy and yRx imply that x = y .

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Proposition
If % is a preference relation, then ∼ is symmetric and transitive, and  is
asymmetric and transitive; in addition, if x  y % z or x % y  z, then x  z.

Proof.
I. ∼ is symmetric. Consider x and y such that x ∼ y . We want to show that
y ∼ x. By definition, x ∼ y ⇒ (x % y and y % x) ⇒ y ∼ x.
II. ∼ is transitive. Consider x, y and z such that x ∼ y and y ∼ z. We want to
show that x ∼ z. By the definition of ∼:

x ∼ y ⇔ x % y, y % x

y ∼ z ⇔ y % z, z % y .
By transitivity of %,
x % y, y % z ⇒ x % z
z % y , y % z ⇒ z % x.
Hence, by the definition of ∼, we have x ∼ z.

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Proof Continued.
III.  is asymmetric. Consider x and y such that x  y . We want to show that
y 6 x. By definition:
x  y ⇔ x % y , y 6% x.
Since y  x implies y % x, it follows that y 6 x.
IV.  is transitive. Consider x, y , and z such that x  y and y  z. We want
to show x  z. By definition:

x  y ⇔ x % y , y 6% x,

y  z ⇔ y % z, z 6% y .
By transitivity of %, we have

x % y , y % z ⇒ x % z.

To see that z 6% x, suppose to the contrary that z % x. Then by transitivity of %,

z % x and x % y imply z % y , contradiction.

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Proof Continued.
V. x  y % z implies x  z. We want to show that x % z and z 6% x. x % z
trivially holds. To see that z 6% x, suppose to the contrary that z % x. Then, by
transitivity of %,
y % z, z % x ⇒ y % x,
contradicting to x  y .

VI. x % y  z implies x  z. Proof omitted.

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Quiz

X = {x, y , z}. Let R = {(x, x), (y , y ), (z, z)}. R is not a preference:

Reflexive: yes;
Complete: no;
Transitive: yes;
Irreflexive: no;
Symmetric: yes;
Asymmetric: no;
Antisymmetric: yes.

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Preference and Choice
If a decision maker has a preference, then she might want to choose her
favorite alternative whenever possible. Choices made by such a decision
maker are said to be rational.
The first question is whether rational choices exist for a given preference.
A menu, or a choice set, is a nonempty subset A ⊆ X . For a given
preference, define

max(A; %) = {x ∈ A : there exists no y ∈ A such that y  x}

to be the set of %-maximal alternatives in A.

Proposition
max(A; %) can be equivalently defined as

max(A; %) = {x ∈ A : x % y , ∀y ∈ A}.

If A is finite, then max(A; %) is nonempty

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Preference and Choice

By the previous proposition, we consider all finite menus of X . Let M be the

set of all finite menus of X .
We want to know when the choices made by a decision maker are rational.

Definition
A choice correspondence is a function c : M → M such that c(A) ⊆ A for each
A ∈ M. c is said to be a choice function if |c(A)| = 1 for each A ∈ M.

Our definition is different from the textbook where they do not use the term
“choice correspondence”.
c(A) is interpreted as the choices made by the decision maker when she can
only choose from A.
A choice correspondence describes the decision maker’s choices in all possible
circumstances.

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Rationalizability

Definition
A choice correspondence c is said to be rationalizable if there exists a preference
% over X such that for each A ∈ M,

c(A) = max(A; %).

Rationalizability basically says that the decision maker chooses her most
preferred alternatives.
We will provide conditions for a choice correspondence to be rationalizable.

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Rationalizability

Sen’s α axiom. if x ∈ A ⊆ B and x ∈ c(B), then x ∈ c(A).

Sen’s α axiom is also called independent of irrelevant alternatives (IIA):
x is chosen in B, and we delete alternatives other than x (irrelevant
alternatives) from B to shrink it to A. x is still chosen.
Interpretation: Xiaoming is a Hongkonger. If he is the best basketball player
in the world, then he must also be the best basketball player in Hong Kong.

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Rationalizability

Sen’s β axiom. If x, y ∈ c(A), A ⊆ B and y ∈ c(B), then x ∈ c(B).

Interpretation: Xiaoming is a Hongkonger. If he is one of the best basketball
players in Hong Kong, and one of the best basketball players in the world is a
Hongkonger, then Xiaoming is also one of the best basketball players in the
world.
Weak Axiom of Revealed Preference (WARP). If x, y ∈ A ∩ B and x ∈ c(A),
then y ∈ c(B) implies x ∈ c(B).
x ∈ c(A), y ∈ A ⇒ x is revealed to be weakly better than y . Hence,
y ∈ c(B) ⇒ x ∈ c(B).

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Rationalizability

Theorem
Consider a choice correspondence c. The following three statements are
equivalent.
1. c is rationalizable.
2. c satisfies Sen’s α and β.
3. c satisfies WARP.

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Proof.
1 ⇒ 2: Suppose that c is rationalizable, i.e., there exists a preference % such
that c(A) = max(A; %) for each A ∈ M.
To see Sen’s α, consider A, B and x such that x ∈ A ⊆ B and x ∈ c(B).

x ∈ c(B) ⇒ x % y , ∀y ∈ B ⇒ x % y , ∀y ∈ A ⇒ x ∈ c(A).

To see Sen’s β, consider A, B and x, y such that x, y ∈ c(A), A ⊆ B and

y ∈ c(B).
x ∈ c(A) ⇒ x % y .

y ∈ c(B) ⇒ y % z, ∀z ∈ B ⇒ x % z, ∀z ∈ B ⇒ x ∈ c(B).

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Proof continued.
2 ⇒ 3 : We want to show that if c satisfies Sen’s α and β, then c satisfies
WARP.
Consider A, B and x, y such that x, y ∈ A ∩ B, x ∈ c(A) and y ∈ c(B). We
show that x ∈ c(B).
x ∈ c(A) ⇒ [Sen’s α] x ∈ c({x, y }). y ∈ c(B) ⇒ [Sen’s α] y ∈ c({x, y }).
x, y ∈ c({x, y }) and y ∈ c(B) ⇒ [Sen’s β] x ∈ c(B).

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Proof continued.
3 ⇒ 1 : Define x % y if x ∈ c({x, y }) or x = y .
Complete: for any x, y , either x ∈ c({x, y }) or y ∈ c({x, y }) or x = y .
Transitive: consider x, y , z such that x % y and y % z, i.e., x ∈ c({x, y })
and y ∈ c({y , z}). We first argue that x ∈ c({x, y , z}):
y, z ∈
/ c({x, y , z}) ⇒ x ∈ c({x, y , z}).
y ∈ c({x, y , z}) ⇒ [WARP and x ∈ c({x, y })] x ∈ c({x, y , z});
z ∈ c({x, y , z}) ⇒ [WARP and y ∈ c({y , z})] y ∈ c({x, y , z}) ⇒ x ∈
c({x, y , z}).

If z ∈
/ c({x, z}), then x ∈ c({x, z}).
If z ∈ c({x, z}), then by x ∈ c({x, y , z}) and WARP, x ∈ c({x, z}).

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Proof continued.
We next show that max(A; %) = c(A) for each A ∈ M.
First, we show that max(A; %) ⊆ c(A), i.e., if x % y , ∀y ∈ A, then x ∈ c(A).
Since x % y for all y ∈ A, we know x ∈ c({x, y }) for all y ∈ A.
Case 1. There is some alternative y 6= x in A such that y ∈ c(A), then
x ∈ c({x, y }) and y ∈ c(A) imply that x ∈ c(A).
Case 2. There is no alternative y 6= x in A such that y ∈ c(A). Then,
c(A) = {x}.

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Proof continued.
Finally, we show that c(A) ⊆ max(A; %), i.e., if x ∈ c(A), then x % y for all
y ∈ A.
Consider any y 6= x and menu {x, y }.
Case 1. If y ∈ c({x, y }), then x ∈ c(A) implies x ∈ c({x, y }) by WARP.
Case 2. If y ∈
/ c({x, y }), then x ∈ c({x, y }).

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Preference and Utility Function

Definition
A preference relation % over X is said to be represented by a function u : X → R
if for any x, y ∈ X , x % y if and only if u(x) ≥ u(y ).

Usually, we call such a function u the utility function.

One should note that the condition for representation is “if and only if”.

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Example
Let X = {x, y , z}. Consider a preference

%= {(x, x), (y , y ), (z, z), (x, y ), (y , z), (x, z)}.

Consider the utility function u such that


u(x) = 3

u(y ) = 2

u(z) = 2


Can u represent %?

First, we check a % b ⇒ u(a) ≥ u(b) for all a, b ∈ X . (Yes)

Next, we check u(a) ≥ u(b) ⇒ a % b for all a, b ∈ X . (No)
Observation: since y  z but u(y ) = u(z), u fails to represent %.

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Proposition
A preference % is represented by u if and only if

x % y ⇒ u(x) ≥ u(y ), and x  y ⇒ u(x) > u(y ).

Proof of the “if” part.

Suppose x % y ⇒ u(x) ≥ u(y ) and x  y ⇒ u(x) > u(y ). We need to show
that u represents %.
We only need to show that u(x) ≥ u(y ) ⇒ x % y .
Suppose to the contrary that y  x. It follows that u(y ) > u(x),
contradiction.

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Proof of the “only if” part.
Suppose that u represents %. We need to show that x  y ⇒ u(x) > u(y ).
Suppose to the contrary that u(y ) ≥ u(x). It follows that y % x since u
represents %, contradiction.

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Proposition
If % is represented by u, and φ : R → R is a strictly increasing function, then φ(u)
also represents %.

Proof.
x % y ⇒ u(x) ≥ u(y ) ⇒ φ(u(x)) ≥ φ(u(y )).
x  y ⇒ u(x) > u(y ) ⇒ φ(u(x)) > φ(u(y )).

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Utility Representation: Countable Alternatives

Definition
A nonempty alternative set X is countable if there is an injection γ : X → N.

In other words, if X is countable, we can write it as X = {x 1 , x 2 , ...}.

Any finite alternative set is countable.
N is countable, but R is not.

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Utility Representation: Countable Alternatives
Theorem
Suppose that the alternative set X is countable. Any preference % over X can be
represented by some utility function u.

Proof.
We construct u such that x % y ⇒ u(x) ≥ u(y ) and x  y ⇒ u(x) > u(y ).
Since X is countable, let γ : X → N be an injection.
Now, we define u such that
X
u(x) = 2−γ(y ) .
y ∈X :x%y

First, note that if x % x 0 , then {y ∈ X : x 0 % y } ⊆ {y ∈ X : x % y }

(transitivity). Hence, x % x 0 ⇒ u(x) ≥ u(x 0 ).

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Proof Continued.
X
u(x) = 2−γ(y )
y ∈X :x%y

We further show that x  x 0 ⇒ u(x) > u(x 0 ).

We just need to show that x  x 0 ⇒ {y ∈ X : x 0 % y } ( {y ∈ X : x % y }.
Note that x ∈ {y ∈ X : x % y } but x 6∈ {y ∈ X : x 0 % y }. We are done.

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Lexicographic Preference

Let X = R 2 . Define % as follows: x % y if either (a) x1 > y1 or (b) x1 = y1

and x2 ≥ y2 .
For example: (3, 4) % (2, 5) and (3, 4) % (3, 2).
Such a preference is called a lexicographic preference.
Since R 2 is not countable, the previous theorem cannot be applied.

Proposition
The lexicographic preference % cannot be represented by any utility function.

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Proof.
Suppose to the contrary that some u represents %.
For any a, b ∈ [0, 1], we know a > b ⇒ (a, 0)  (b, 0) ⇒ u(a, 0) > u(b, 0).
Define φ : [0, 1] → R as φ(a) = u(a, 0). φ(a) is strictly increasing in [0, 1].
Thus, φ is almost everywhere continuous.
Take c ∈ (0, 1) such that φ is continuous on c.
Since φ(c) = u(c, 0) < u(c, 1), by continuity of φ on c, there exists  > 0
such that φ(c + ) is close to φ(c) which leads to φ(c + ) < u(c, 1).
However, note that

φ(c + ) = u(c + , 0) ⇒ u(c + , 0) < u(c, 1) ⇒ (c, 1)  (c + , 0),

contradiction.

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Preliminary: Metric Space
A metric space is a tuple (X , d) where X is a set and d : X × X → R+
measures the distance between any two points in the set and satisfies:
d(x, y ) = 0 if and only if x = y ;
d(x, y ) = d(y , x);
d(x, y ) + d(y , z) ≥ d(x, z).

Example
Consider (X , d) where X = R+n : the set of all consumption bundles, and
v
u n
uX
d(x, y ) = t (xi − yi )2 .
i=1

1. d(x, y ) = 0 if and only if x = y ;

2. d(x, y ) = d(y , x);
3. A line is the shortest distance between two points.
Remark. When we talk about Euclidean space, the metric is always assumed to
be the above one. (It is called the Euclidean metric)
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Open and closed sets

Definition
Fix a metric space (X , d):
a subset A ⊆ X is open if for any x ∈ A, there exists  > 0 such that
{y ∈ X : d(x, y ) < } ⊆ A;
a subset B ⊆ X is closed if X \B is open.
For simplicity, let B (x) := {y ∈ X : d(x, y ) < }.

Remark. Union of open sets is open, intersection of closed sets is closed.

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Definition
A sequence of points {x k }+∞ k
k=1 is said to converge to x if lim d(x, x ) = 0.
k→+∞

Proposition
A subset B of X is closed ⇔ for any sequence {x k }+∞
k=1 ⊆ B, if the sequence
converges to x, then x ∈ B.

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Proof.
First, suppose that B is closed. We show {x k }+∞
k=1 ⊆ B converges to x ⇒
x ∈ B.
Suppose to the contrary that x ∈
/ B. Then x ∈ A = X \B, where A is open.
Since A is open, there exists  > 0 such that y ∈ A for all y ∈ B (x).
Since {x k }+∞
k=1 ⊆ B converges to x, we can find some K large enough such
that x K ∈ B (x), contradiction.

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Proof continued.
Second, suppose that for any sequence in B, if the sequence converges to
some x, then x must be in B. We want to show that B is closed.
Suppose to the contrary that B is not closed. That is, A = X \B is not open.
Since A is not open, there exists a point x ∈ A such that for any  > 0, there
exists y ∈ B (x) such that y ∈
/ A.
Let  = 11 , 21 , ..., k1 , ... We can find a sequence {y k }+∞ k
k=1 such that y ∈ B k1 (x)
k k
and y ∈ / A for each k. That is, y ∈ B for each k and converges to x.
However, since x ∈ A, we have a contradiction.

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Continuous Preference

Definition
Fix a metric space (X , d). A preference % over X is continuous if for any x ∈ X ,
{y : y % x} and {y : x % y } are closed.

Proposition (trivial proof omitted)

Let % be a continuous preference over (X , d). The following statements hold.
If x  y , then there exists  > 0 such that x  z for all z ∈ B (y ).
If x  y , then there exists  > 0 such that z  y for all z ∈ B (x).
If x % y for all y ∈ {y k }+∞ k
k=1 , and lim d(y , z) = 0, then x % z.
k→+∞

If y % x for all y ∈ {y k }+∞

k=1 , and lim d(y k , z) = 0, then z % x.
k→+∞

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Utility Representation in R+n

Now, we consider the space of consumption bundles R+n (with Euclidean

metric).
Here are some notations that we usually use in n-dimensional Euclidean
space:
x ≥ y : xk ≥ yk for all k ∈ {1, ..., n}.
x > y : xk ≥ yk for all k ∈ {1, ..., n} and x 6= y .
x  y : xk > yk for all k ∈ {1, ..., n}.
R+n = {x ∈ R n : x ≥ (0, ..., 0)}.
n
R++ = {x ∈ R n : x  (0, ..., 0)}.

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Definition
A preference % over R+n is monotone if (1) x  y ⇒ x  y .
A preference % over R+n is strongly monotone if (2) x > y ⇒ x  y .

Proposition
If % is continuous, then either condition (1) or (2) implies that x ≥ y ⇒ x % y .

Proof.
Since condition (2) implies (1), assume condition (1) holds.
Suppose to the contrary that there exist x and y such that x ≥ y and y  x.
Since % is continuous, there exists  > 0 such that y  z for all z ∈ B (x).
In particular, we can take z such that zk = xk + 2 for all k ∈ {1, ..., n}.
Such z satisfies z  x and thus z  y , contradicting to y  z.

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Monotone and Strongly Monotone

Example
Consider a preference % over R+2 : (x1 , x2 ) % (y1 , y2 ) if and only if
min{x1 , x2 } ≥ min{y1 , y2 }.
Interpretation: x1 is the number of left shoes, x2 is the number of right shoes. It
is monotone but not strongly monotone, e.g., both (3, 3) and (3, 4) denote 3 pairs
of shoes.

Example
Consider a preference % over R+2 : (x1 , x2 ) % (y1 , y2 ) if and only if
x1 + x2 ≥ y1 + y2 .
Interpretation: x1 is the number of apples, x2 is the number of oranges. This
preference is strongly monotone.

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Theorem
A continuous and (strongly) monotone preference over Rn+ has a utility
representation.

Proof.
Consider a continuous and monotone preference %. We construct the utility
function u.
For any alternative x = (x1 , ..., xn ) ∈ Rn+ , by the previous proposition, we
have x̄ % (x1 , ..., xn ) % x where

x̄i = max xk for each i ∈ {1, ..., n}

k∈{1,...,n}

xi = min xk for each i ∈ {1, ..., n}.

k∈{1,...,n}

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Proof continued.
We argue that there exists a with mink∈{1,...,n} xk ≤ a ≤ maxk∈{1,...,n} xk
such that (a, a, ..., a) ∼ x. There are two cases to be considered.
Case 1. mink∈{1,...,n} xk = maxk∈{1,...,n} xk . Then, (a, a, ..., a) = x, and we
are done.
Case 2. mink∈{1,...,n} xk < maxk∈{1,...,n} xk . Let a = mink∈{1,...,n} xk and
ā = maxk∈{1,...,n} xk . Suppose to the contrary that there exists no a ∈ [a, ā]
such that x ∼ (a, a, ..., a), then there exists a∗ ∈ [a, ā] such that

∀a0 ∈ [a, a∗ ), x  (a0 , a0 , ..., a0 ),

∀a0 ∈ (a∗ , ā], (a0 , a0 , ..., a0 )  x.

However, since % is continuous, we know

x % (a∗ , a∗ , ..., a∗ ) % x.

That is (a∗ , a∗ , ..., a∗ ) ∼ x, contradiction.

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Proof continued.
Since for each x, there exists a ∈ [mink∈{1,...,n} xk , maxk∈{1,...,n} xk ] such that
x ∼ (a, a, ..., a). Define u(x) = a.
First, we show that u is well-defined. That is, a is unique. Suppose to the
contrary that x ∼ (a, a, ..., a) and x ∼ (b, b, ..., b) for a 6= b. Since ∼ is
transitive, we have (a, a, ..., a) ∼ (b, b, ..., b), contradiction.
Next, we show that x % y ⇒ u(x) ≥ u(y ). It is obvious since
x ∼ (a, a, ..., a) % y ∼ (b, b, ..., b) ⇒ (a, a, ..., a) % (b, b, ..., b) ⇒ a ≥ b.
Finally, we show that x  y ⇒ u(x) > u(y ). This is also trivial. We are done.

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Back to lexicographic preference

Recall that a lexicographic preference over R+2 has no utility representation.

Lexicographic preference satisfies monotonicity since

x  y ⇒ x1 > y1 ⇒ x  y .

Lexicographic preference is not continuous: consider x = (2, 2) and

A = {y : x  y } = {(a, b) : a < 2} ∪ {(2, b) : b < 2}.

A is not open since (2, 1) ∈ A and for any  > 0, we can take
 
(2 + , 1 + ) ∈
/ A.
2 2

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Continuous Utility Representation

Definition
A function f : X → R is continuous if for any x ∈ X and any sequence {x k }+∞
k=1
converging to x, lim f (x k ) = f (x).
k→∞

Proposition
Consider a function f : X → R. The following statements are equivalent.
f is continuous.
f −1 (A) is open in X for any open set A ⊆ R.
f −1 (B) is closed in X for any closed set B ⊆ R.

Remark. Usually, we only need to check that {x : f (x) < a} and {x : f (x) > a}
are open for any a, then f is continuous.

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Continuous Utility Representation

Theorem
A continuous (and monotone) preference over Rn+ can be represented by
continuous utility function.

Remark. In fact, the previously constructed utility function is continuous.

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