Class notes
Principles of Microeconomics Lecture 3 - Utility
- Course
- Institution
- Book
These notes discuss the economics of utility. Marginal utility and MRS are discussed.
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
Exam (elaborations) ECO4010 Intermediate Microeconomics final exam review questions with 100% correct answers
-
ECS2602 October/November Exam 2024
-
Samenvatting Intermediate Microeconomics - Microeconomics II (E_EBE2_MICEC)
Seller
Follow
arranmoralesmacias
Content preview
Principles of Microeconomics Lecture 3 – utility A preference that is complete, reflexive, transitive and continuous can be represented by a continuous utility
function
Continuity means that small changes to a consumption bundle cause only small changes to the preference
level
A utility function U(x) represents a preference relation
Utility is an ordinal concept
o If U(x) = 6 and U(y) = 2, then bundle x is preferred to y but not 3 times preferred
Equal preferences = same utility level
Therefore, all bundles in an indifference curve have the same utility level
Therefore, if a bundle has a higher utility level than another that first bundle must be on a higher
indifference curve
Sometimes a 3 dimensional graph can be plotted to show the consumption bundle and the utility level of
each bundle
There is no unique utility function representation of a preference relation
Example
o U(x1,x2) = x1x2 (2,3) (4,1) ~ (2,2).
o Define W = 2U + 10.
o Then W(x1,x2) = 2x1x2+10 so
W(2,3) = 22 > W(4,1) = W(2,2) = 18. Again,
(2,3) (4,1) ~ (2,2).
o W preserves the same order as U and V and so represents the same preferences.
If U is a utility function that represents a preference relation and f is a strictly increasing function, then V =
f(U) is also a utility function representing the same preference relation
A bad is a commodity unit which decreases with utility
It is possible for a good to behave like a good up to a certain point, after which it begins to behave like a bad
The marginal utility of commodity i is the rate-of change of total utility as the quantity of commodity i is
consumed changes
To find marginal utility in relation to one good in the consumption bundle you must differentiate the utility
function in relation to that good
Applying a monotonic transformation to a utility function representing a preference relation simply creates
another utility function representing the same preference relation
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller arranmoralesmacias. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.79. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
75759 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now