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Econ101 Chapter 4 Outline

Econ101 Chapter 4 Outline - ECON101 Chapter 4 Outline...

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ECON101- Chapter 4 Outline: Utility- way to describe preferences, label indifference curves Utility function- preferred if Ordinal utility- emphasis on ordering of bundles instead of the magnitude of utility function Monotonic transformation- (i.e. scalar multiplication) o Multiplication by positive number o Adding any number o Raising u to an odd power If f(u) is any monotonic transformation of a utility function that represents some particular preferences, then f(u(x1,x2)) is also a utility function that represents those same preferences o To say that u(x1,x2) represents some particular preferences means that u(x1,x2) > u(y1,y2) if and only if (x1,x2) (y1,y2) o But if f(u) is a monotonic transformation, then u(x1,x2) > u(y1,y2) if and only if f(u(x1,x2)) > f(u(y1,y2)) o Thus, f(u(x1,x2)) > f(u(y1,y2)) if and only if (x1, x2) (y1,y2), so the function f(u) represents the preferences in the same way as the original utility function u(x1,x2) o A monotonic transformation of a utility function is a utility function that represents the same preferences as the original utility function.
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