ECON 50 Chapter Notes - Chapter 4: Marginal Utility, Monotonic Function, Cardinal Utility

• School: Stanford University
• Department: Economics
• Course: ECON 50
• Professor: christopher Makler

Document Summary

Utility function: assigning number to every possible consumption bundle that more preferred bundles get assigned larger numbers than less-preferred bundles. The only property of utility assignment is how to order bundles of goods. Magnitude of utility function ranks different consumption bundles. Ordinal utility: the size of utility difference between any bundles doesn"t matter. Monotonic transformation: transforming one set of numbers into another set of numbers that preserves order of numbers. Represent monotonic transformation by function f(u) in a way such that u1>u2, and f(u1)>f(u2) Monotonic transformations include: multiplication, adding number, odd power raised. Rate of change of f(u) as u changes: f(u2)-f(u1)/(u2-u1) For all monotonic transformations, f(u2)-f(u1) always has same sign as u2-u1. Therefore, always positive rate of change for monotonic function. If f(u) is any monotonic transformation, then f(u(x1, x2)) is also a utility function that represent those same preferences. A monotonic transformation of utility function is a utility function that represents the same preference as original utility function.