# Chapter4 - Chapter 4 Utility 1 Two ways of viewing...

• Notes
• 3

This preview shows pages 1–2. Sign up to view the full content.

Chapter 4 - Utility 1. Two ways of viewing utility (a) old way - measures how “satisfied” you are not operational many other problems (b) new way summarizes preferences a utility function assigns a number to each bundle of goods so that more preferred bundles get higher numbers that is, u ( x 1 , x 2 ) > u ( y 1 , y 2 ) if and only if ( x 1 , x 2 ) ( y 1 , y 2 ) only the ordering of bundles counts, so this is a theory of ordinal utility advantages operational gives a complete theory of demand 2. Utility functions are not unique (a) if u ( x 1 , x 2 ) is a utility function that represents some preferences, and f () is any increasing function, then f ( u ( x 1 , x 2 )) represents the same preferences (b) why? Because u ( x 1 , x 2 ) > u ( y 1 , y 2 ) only if f ( u ( x 1 , x 2 )) > f ( u ( y 1 , y 2 )) (c) so if u ( x 1 , x 2 ) is a utility function then any positive monotonic transformation of it is also a utility function that represents the same preferences 3. Constructing a utility function (a) can do it mechanically using the indifference curves (see figure 4.2.

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

This is the end of the preview. Sign up to access the rest of the document.
• Summer '10

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern