Advanced Microeconomics 1
Helsinki GSE
Juuso Välimäki
Problem Set 1, 2024
1. A decision maker makes choices in a domain consisting of five alternatives: X = {a, b, c, d, e}.
A choice function assigns to any non-empty subset A of X a choice c(A) ∈ A.
(a) How many different choice functions could the decision maker have?
(b) How many different coherent choice functions satisfying the Independence of Irrelevant
Alternatives can she have?
2. Determine for the following binary relations if they are reflexive, symmetric or transitive:
(a) xRy on natural numbers if x divides y.
(b) xRy on natural numbers if x + y is even.
(c) xRy on natural numbers if xy is even.
3. Show that if ≻ is asymmetric and negatively transitive, then ⪰ derived from ≻ by setting
x ⪰ y ⇐⇒ ¬(y ≻ x),
is a rational preference relation.
4. Start with a strict preference relation ≻ that is asymmetric and transitive, (but not negatively
transitive). Define weak preference ⪰ by
x ⪰ y ⇐⇒ ¬(y ≻ x),
and indifference ∼ by
x ∼ y ⇐⇒ ¬(x ≻ y) and ¬(y ≻ x).
Give an example of such a strict preference where the derived ⪰ is not a rational preference
relation.
5. Two decision makers i ∈ {1, 2} have complete and transitive preferences ⪰i on X. They agree
to for a common preference ⪰ satisfying for all x, y ∈ X,
x ⪰ y ⇐⇒ x ⪰i y for some i ∈ {1, 2}.
(a) Is ⪰ complete?
(b) Is it transitive?
6. Explain if the following procedures lead to a coherent choice rule (i.e. a choice rule satisfying
Sen’s α and Sen’s β:
(a) The decision maker chooses the second cheapest wine from any menu with at least two
wines on it and the only choice if faced with a single alternative.
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(b) Two committee members i ∈ {1, 2} with a strict ordering on a finite set rank alternatives
from best (smallest score) to worst (highest score) and choose the alternative with the
lowest sum of scores.
(c) Continue with the assumptions of the previous part except that now committee member
i = 2 gets to make the choice. She maximizes the suffering of member i = 1, i.e. c(A) is
the worst alternative in A ⊂ X for i = 1.
7. You are an HR manager at a firm in charge of hiring new workers. You conduct job interviews
in the following manner. For any set of job applicants A, you invite then for the interview in
alphabetical order. You score their interview on a scale from 0 to 100 and the first applicant
that gets a score at or above 90 is hired. If none of them gets such a grade, you hire the last
applicant in alphabetical order. Is this procedure rational in your opinion? Does it satisfy
Independence of Irrelevant Alternatives?
8. (Bonus Question) Read ’A Condition for the Completeness of Partial Preference Relations’ by
David Schmeidler in Econometrica (1971) pages 403-404, and explain the logic of the proof
in your own words. Can you find an example of a non-trivial continuous but incomplete
preference relation on R2+ (i.e. a relation that satisfies ii), iii) and iv) in Schmeidler (1971)) ?
9. (Bonus Question) Suppose that X is a finite set and the decision maker has in mind two one-
to-one numerical functions u and v on X. Interpret the following choice procedures in words,
and determine whether they lead to choice rules satisfying the Independence of Irrelevant
Alternatives.
(a) Fix a number v ∗ . For any choice problem A ⊂ X, let a∗ be the maximizer of u over A
and b∗ be the maximizer of v over A. The decision maker chooses a∗ if v(a∗ ) ≥ v ∗ and
she chooses b∗ otherwise.
(b) Fix u∗ . For any choice problem A, the DM chooses a∗ maximizing u if u(a∗ ) ≥ u∗ ,
otherwise she chooses b∗ maximizing v.
10. (Bonus Question) We say that a collection P of subsets of X is a nested family of subsets if
for any P, Q ∈ P, either P ⊂ Q or Q ⊂ P . We say that x ≻ y if there is an set P ∈ P such
that x ∈ P such that y ∈/ P . Write x ⪰ y if ¬(y ≻ x).
(a) Show that ⪰ is complete and transitive.
(b) For any complete and transitive relation on X, show that there exists a family of nested
subsets corresponding to the order as above.
(c) Give an economic interpretation to the nested family of sets in the previous part.