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Axiom of transitive preferences
#cfa #cfa-level-1 #economics #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #section-3-utility-theory #study-session-4
We would say that if a consumer prefers a skiing holiday to a diving holiday and a diving holiday to a backpacking holiday and at the same time prefers a backpacking holiday to a skiing holiday, then he is acting irrationally. Transitivity rules out this kind of inconsistency. If you have studied psychology, however, you will no doubt have seen experiments that show subjects violating this assumption, especially in cases of many complex options being offered to them.
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3. UTILITY THEORY: MODELING PREFERENCES AND TASTES
sumption is referred to as the assumption of transitive preferences , and it is assumed to hold for indifference as well as for strict preference. This is a somewhat stronger assumption because it is essentially an assumption of rationality. <span>We would say that if a consumer prefers a skiing holiday to a diving holiday and a diving holiday to a backpacking holiday and at the same time prefers a backpacking holiday to a skiing holiday, then he is acting irrationally. Transitivity rules out this kind of inconsistency. If you have studied psychology, however, you will no doubt have seen experiments that show subjects violating this assumption, especially in cases of many complex options being offered to them. When we state these axioms, we are not saying that we believe them actually to be true in every instance, but we assume them for the sake of building a model. A model is a


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