VictorBuzz

INTRODUCTION:

In Victorian days, philosophers and economists talked blithely of “utility” As an indicator of a person’s overall well-being. The utility was considered as A numeric measure of a person’s happiness. Given this concept, it had been natural To consider consumers making choices so as to maximize their utility, that Is, to form themselves as happy as possible. The trouble is that these classical economists never really described how We were to live utility. How are we alleged to quantify the “amount” Of utility related to different choices? Is one person’s utility equivalent To another’s? What wouldn’t it mean to mention that an additional candy would Give me twice the maximum amount of utility as an additional carrot? Does the concept of utility Have any independent meaning aside from its being what people maximize? Because of those conceptual problems, economists have abandoned the Old-fashioned view of utility as being a measure of happiness. Instead, The theory of consumer behavior has been reformulated entirely in terms Of consumer preferences, and utility is seen only as how to explain Preferences. Economists gradually came to acknowledge that each one that mattered about Utility as far as choice behavior was concerned was whether one bundle Had a far better utility than another—how much higher didn’t really matter.

WAYS TO ASSIGN UTILITY:

Since only the ranking of the bundles matters, there are often no unique thanks to assigning utilities to bundles of products. If we will find a method to assign Utility numbers to bundles of products, we will find an infinite number of way to try to do it. If u(x1, x2) represents how to assign utility numbers to The bundles (x1, x2), then multiplying u(x1, x2) by 2 (or the other positive Number) is simply nearly as good as how to assign utilities. Multiplication by 2 is an example of a monotonic transformation. A monotonic transformation could also be how of transforming one set of numbers into another set of numbers during how that preserves the order of the numbers. We typically represent a monotonic transformation by a function f(u) that transforms each number u into another number f(u), in a way that preserves the order of the numbers within the sense that u1 > u2 implies f(u1) > f(u2). A monotonic transformation and a monotonic function are essentially equivalent things. Examples of monotonic transformations are multiplication by a positive number (e.g., f(u)=3u), adding any number (e.g., f(u) = u + 17), raising u to an odd power (e.g., f(u) = u3), and so on.1 the speed of change of f(u) as u changes are often measured by watching the change in f between two values of u, divided by the change in u.

For a monotonic transformation, f(u2)−f(u1) always has an equivalent sign as U2 – u1. Thus a monotonic function always features a positive rate of change. This means that the graph of a monotonic function will always have a Positive slope

CARDINAL UTILITY:

theories of utility that attach a significance to the magniTude of utility. These theories are referred to as cardinal utility theories. during a theory Of cardinal utility, the dimensions of the utility difference between two bundles of products are meant to possess some kind of significance.WeWe skills to inform whether a given person prefers one bundle of products To another: we simply offer him or her a choice between the 2 bundles and see which one is chosen. Thus we all know the way to assign an ordinal utility To the 2 bundles of goods: we just assign a better utility to the chosen Bundle than to the rejected bundle. Any assignment that does this may be A utility function. Thus we have an operational criterion for determining Whether one bundle features a higher utility than another bundle for a few individuals.

CONSTRUCTING UTILITY FUNCTIONS:

But are we assured that there are any thanks to assigning ordinal utilities? Given A preference ordering can we always find a utility function that will order Bundles of products within the same way as those preferences? Is there a utility Function that describes any reasonable preference ordering Not all types of preferences are often represented by a utility function? For example, suppose that somebody had intransitive preferences in order that. Then a utility function for these preferences would need to contains numbers u(A), u(B), and u(C) such u(A) > u(B) >U(C) > u(A). But this is often impossible. However, if we rule out perverse cases like intransitive preferences, it turns out that we’ll typically be ready to find a utility function to represent Preferences. we’ll illustrate one construction here, and another one in Chapter 14. Suppose that we are given an indifference map as in Figure 4.2. we all know That a utility function maybe thanks to labeling the indifference curves such Higher indifference curves get larger numbers. How can we do this? One easy way is to draw the diagonal line illustrated and label each indifference curve with its distance from the origin measured along the road . How can we know that this is often a utility function? it’s not hard to ascertain that If preferences are monotonic then the road through the origin must intersect Every indifference curve exactly once. Thus every bundle is getting a label, And those bundles on higher indifference curves are becoming larger labels—And that’s all it takes to be a utility function.

MARGINAL UTILITY:

Consider a consumer who is consuming some bundle of products, (x1, x2). How does this consumer’s utility change as we give him or her a touch more of excellent 1? This rate of change has been named the utility with reference to good 1. We write it as MU1 and consider it as being a ratio, That

measures the speed of change in utility (ΔU) related to a little change within the amount of excellent 1 (Δx1). Note that the quantity of excellent 2 is held fixed during this calculation.