# Utilitty - Chapter Four Utility Utility Central concept in...

This preview shows pages 1–10. Sign up to view the full content.

Chapter Four Utility

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

View Full Document
Utility Central concept in economics. Idea is to measure happiness or satisfaction Traced back to utilitarianism Neo-classical interpretation
Preferences - A Reminder x y: x is strictly preferred to y. x y: x and y are equally preferred. x y: x is preferred to y. t ~

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

View Full Document
Utility Functions Utility functions are numerical functions by which we represent preferences. A function U(x) represents a preference relation if and only if: x’ x” U(x’) >= U(x”) ~ ~
Utility Function A preference relation that is complete, reflexive, transitive and continuous can be represented by a continuous utility function . Continuity means that small changes in the bundles lead to small changes in the preference level.

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

View Full Document
Utility Functions Utility is an ordinal (i.e. ordering) concept. Example: 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 .
Consider the bundles (4,1), (2,3) and (2,2). Suppose (2,3) (4,1) (2,2). Say U(2,3) = 6 > U(4,1) = U(2,2) = 4. Call these numbers utility levels . t

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

View Full Document
Utility Functions & Indiff. Curves An indifference curve contains all equally preferred bundles. Therefore, an indifference curve contains all the bundles that have the same utility level.
So the bundles (4,1) and (2,2) are in the indiff. curve with utility level U ≡ 4 But the bundle (2,3) is in the indiff. curve with utility level U 6. On an indifference curve diagram, it

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 11/07/2010 for the course ECO 33358 taught by Professor Mathevet during the Fall '10 term at University of Texas at Austin.

### Page1 / 54

Utilitty - Chapter Four Utility Utility Central concept in...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online