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Chapter 4

Chapter 4.docx

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ECON 2201

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Chapter 4 – Utility Utility function – a way of assigning a number to every possible consumption bundle so more preferred bundles get a higher number than less preferred bundles - Ordinal utility – only the ordering of utilities matters, not the magnitude Monotonic transformation – a way of transforming a set of numbers into another set of numbers in a way that preserves their order, or their utility - Examples are multiplication by a positive number, adding a number, raising u to an odd power, etc. - Monotonic transformation always have a positive rate of change, measured by looking at the change in f between two values of u divided by the change in u Amonotonic transformation of a utility function is a utility function that represents the same preferences as the original utility function. If you draw multiple indifference curves, then draw a line starting at the origin through them, then they are monotonic if the origin line intersects every curve exactly once If you are given a utility function, you can plot an indifference curve by plotting all points (X , 1 X ) when u(X , X ) is equal to a constant. 2 1 2 Perfect substitutes – the utility function u(X , X ) = 1 + 2 or any1monot2nic transformations of it - Represented by the function u(X , X ) = A1 + 2X 1 2 - Slope is given by –Adivided by B Perfect complements – the c
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