Chapter 7: Consumer Behavior.docx - Utility basics Utility is a measure of the amount of satisfaction a person derives from something Incorporates

Chapter 7: Consumer Behavior.docx - Utility basics Utility...

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Utility basics: Utility is a measure of the amount of satisfaction a person derives from something Incorporates emotions and sensations Universal measure that allows individuals to compare choices Not comparable across individuals Rational individuals maximize utility when making choices Revealed preferences: How can anything meaningful be said about the utility people experience? Observe what people actually do Principle of revealed preference is that people’s preferences can be determined by observing their choices and behavior Isn’t feasible for analyzing how people make choices Utility functions: Utility functions aid in systematically analyzing choices Utility function is a formula for calculating the total utility that a particular person derives from consuming a combination of goods and services (bundle of commodity) Utility functions quantify preferences Utility measurements are relative, not absolute Marginal utility: From chapter 1: consumers make decisions based on marginal cost and marginal benefit ( marginal utility ).
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