ECO206Y1 Lecture Notes - Indifference Curve, Utility, Substitute Good

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28 Sep 2011
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Utility function: cu = u(x1, x2, x3, , xn) Math representation of preference ordering: x>y u(x)>u(y, x y u(x)=u(y) * numbers in the utility function are ordinal not cardinal * From the utility function, we only know the order of the preference (whether x is before y), not the strength of the preference (whether the utility of x is 3 times greater than y) * these utility functions are only unique to a positive monotonic transformation . e. g. v[u(x) = [u(x)]2; 3 + 2u(x); 5 + lnu(x) - positive monotonic transformation is like relabeling of the preferences ; - it does not change the order of preferences; Set of commodity bundles that satisfies u(x 1, x2) = uo (some level of utility) x2. - indifference curve pass to the right indicate higher utility (assume more is better ) *mu of x1: the utility one gets from consuming one more unit of x1, holding x2 constant.

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