Microeconomics Assumptions

def. Rational Preference. Consider two basket of goods . A rational preference is one that is all of the following:

  1. Complete: either
    1. Comparable: You have to choose either of the above three
  2. Transitive:
  3. Monotonic:

The following are optional conditions

  • Convexity: Averages are bette than extremes. (Preference of variety)

  • The rational preference assumption and the convexity assumption will together be enough to define an Utility Function.

  • Two tastes are same if they have the same utility function, or the utility functions are Monotonic Transformations of one another.


  • : A is equally preferable with B
  • : A is strictly preferred to B
  • : A is equally or more preferable to B
  • : A is equally preferred to B (indifferent)

def. Homothetic Tastes. Two equivalent definitions

  1. Tastes are homothetic if the utility function (or its Monotonic Transformation) is HD of degree
  2. Tastes are homothetic if the MRS depends only on

Quasilinear Taste