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Bomber enjoys, eating sausages. He also enjoys reading Shakespeare. Bomber is confronted with two baskets: Basket A, contains several goods and a package of sausages, and B, contains identical quantities of the other goods as Basket A, but instead of the sausages, it contains a book by Shakespeare.

When asked which basket she prefers, he replies, “I like them both, but sausages and a book by Shakespeare are so different that I cannot compare the two baskets.”

Determine whether Bomber is obeying all the axioms of preference theory.

Solution:

Smith is violating the assumption of complete preferences.

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3. UTILITY THEORY: MODELING PREFERENCES AND TASTES
at analysis, we shall model the willingness of the investor to trade off between increased investment returns and increased certainty, which is the absence of risk. EXAMPLE 1 Axioms Concerning Preferences <span>Helen Smith enjoys, among other things, eating sausages. She also enjoys reading Marcel Proust. Smith is confronted with two baskets: Basket A, which contains several other goods and a package of sausages, and B, which contains identical quantities of the other goods as Basket A, but instead of the sausages, it contains a book by Proust. When asked which basket she prefers, she replies, “I like them both, but sausages and a book by Proust are so different that I simply cannot compare the two baskets.” Determine whether Smith is obeying all the axioms of preference theory. Solution: Smith is violating the assumption of complete preferences. This assumption states that a consumer must be able to compare any two baskets of goods, either preferring one to the other or being indifferent between the two. If she complies with th