ECON 102 Lecture Notes - Lecture 3: Economic Surplus, Utility, Junkers J.I

• School: U of M
• Department: Economics
• Course: ECON 102
• Professor: Miles Kimball

Document Summary

Using a utility function that represents inequality aversion: introduction. Principles textbooks typically talk about both efficiency and equity as important issues, but give analytical tools only for thinking about efficiency. This handout develops analytical tools for thinking about equity and efficiency at the same time. The key tool is a utility function designed to represent how people feel about inequality. For almost any purpose, the favorite form of a utility function u(c) for macroeconomists is. C: consumption per person (equal to income per person for a household that is neither borrowing nor saving) g: inequality aversion parameter ( gamma ) The reason this form of the utility function is a favorite is that economists are able to think of this utility function as having the same curvature at every point on the curve. g is this curvature. The bigger gis, the more sharply curved the utility function is.