ECON301 Study Guide - Midterm Guide: Economic Equilibrium, Utility, Competitive Equilibrium

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Utility is a purely theoretical construct defined as: If an individual is indifferent between a bundle x and another bundle y, then. The only property of a utility assignment that is important is how it orders the bundles of goods. A utility function u is just a mathematical function that assigns a numeric value to each possible bundle such that: If an individual strictly prefers bundle x to bundle y, then u(x1,x2)>u(y1,y2) If an individual is indifferent between a bundle x and y, u(x1,x1)=u(y1,y2) All bundles in an indifference curve have the same utility level. If u(x1,x2) is a utility function, then any positive monotonic transformation of it is a utility function that represents the same preferences. There is no unique utility fcn representation of a preference relation. U(x1,x2)= ax1 + bx2, with a> and b> 0. U(x1,x2) = min{ax1, bx2} , with a> and b>0.

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