Ch4_class_09

Ch4_class_09 - Chapter Four Utility Utility Functions A...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter Four Utility
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Utility Functions A preference relation that is complete, reflexive, transitive and continuous can be represented by a continuous utility function . Continuity means that small changes to a consumption bundle cause only small changes to the preference level.
Background image of page 2
Utility Functions A utility function U(x) represents a preference relation if and only if: x y U(x) > U(y) x y U(x) < U(y) x y U(x) = U(y). ~ &
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Utility Functions Utility is an ordinal (i.e. ordering) concept. E.g . if U(x) = 6 and U(y) = 2 then bundle x is strictly preferred to bundle y. But x is not preferred three times as much as is y.
Background image of page 4
Consider the bundles (4,1), (2,3) and (2,2). Suppose (2,3) (4,1) (2,2). Assign to these bundles any numbers that preserve the preference ordering; e.g. U(2,3) = 6 > U(4,1) = U(2,2) = 4. Call these numbers utility levels . t
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Utility Functions & Indiff. Curves An indifference curve contains equally preferred bundles. Equal preference same utility level. Therefore, all bundles in an indifference curve have the same utility level.
Background image of page 6
U 6 U 4 U 2 x 1 x 2
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Utility Functions There is no unique utility function representation of a preference
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 28

Ch4_class_09 - Chapter Four Utility Utility Functions A...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online