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1. Preferences are complete- that is, the consumer is able to rank any two baskets for baskets A and B for example, the consumer can state her preferences according to one of the following possibilities:
She prefers basket A to basket B
She prefers basket B to basket A
She is in different between or equally happy with baskets A and B
2. Preferences are transitive - This means that if a consumer prefers bundle A to bundle B and the consumer prefers bundle B to bundle C, then the consumer must prefer bundle A to bundle C. For example, if I prefer pizza to ice cream, but like ice cream better than carrots, then I must like pizza more than carrots. Geometrically, transitive preferences imply that indifference curves cannot cross.
3. Preferences are continuous- This means that if a consumer prefers bundle A to bundle B, and if bundle C is only infinitesimally far away from bundle A, then the consumer also prefers bundle C to bundle B. What this rules out is sudden changes in preference patterns resulting from tiny changes. Geometrically, this means that indifference curves can be represented by continuous functions without breaks.
4. Preferences are monotonic- Another way to state this is “more is better”. This just means that, starting with bundle A, if bundle B contains more of either good, then the consumer would prefer bundle B to bundle A. In other words, the commodities are “good” and not “bad”. Preferences over dirty cat litter are not monotonic, since a consumer would prefer to have less dirty cat litter. Geometrically, this means two things. First, higher indifference curves (containing more of both goods) are preferred to lower indifference curves. Second, indifference curves slope downwards – the consumer likes good X, and is willing to give up some good Y in order to obtain more.
5. Preferences are convex- This is a way of saying that preferences satisfy the law of diminishing marginal rate of substitution. Geometrically, this means that indifference curves are convex to the origin – the MRS is high initially and then falls as the consumer obtains more of good X.
Preferences that are complete and transitive are called rational. Without rational preferences, it is impossible to do much of anything. Preferences that are complete, transitive, continuous, monotonic and convex are called well-behaved.
TonyLL answered the question on February 16, 2018 at 09:03
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