ECON 401 Chapter Notes - Chapter 4: Indifference Curve, Utility, Cardinal Utility
Chapter 4: Utility
• https://www.youtube.com/watch?v=kJ43GdU5Uzc&t=19s
• Utility: numeric easure of a perso’s happiess
• How to make the choice that maximizes utility?
• Theory of consumer behavior: utility as a way to describe preferences
• Utility function: a way of assigning a number to every possible consumption bundle such
that more-preferred bundles get assigned larger numbers than less-preferred bundles.
Ordinal/ranking.
• Monotonic transformation: a way of transforming one set of numbers into another set
of numbers in a way that preserves the order of the numbers. if f(u) is any monotonic
transformation of a utility function, then f(u( ) represents those same preferences.
ALWAYS HAS A POSITIVE ROC.
o ROC of f(u) as u changes:
• Utility function is a way to label indifference curves: since every bundle on an
indifference curve must have the same utility, a utility function is a way of assigning
numbers to the different indifference curves in a way that higher indifference curves get
assigned larger numbers.
o Monotonic transformation is a relabeling of these indifference curves
4.1 Cardinal Utility
• Cardinal utility theories: attach a significance to the magnitude of utility
• To tell whether one bundle or another will be chosen, we only have to know which is
preferred hich has the larger utility… koig ho uch larger does’t add aythig
to our description of choice
4.2 Constructing a Utility Function
• Not all kinds of preferences can be represented by a utility function
o Ex. A ≻ B ≻ C ≻ A u(A) > u(B) > u(C) > u(A). Not possible!
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ECON 401 Full Course Notes
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