Utility

Question 1

Utility

Answer 1

a measure of happiness

Question 2

Utility Function

Answer 2

assigning a utility value/number of utility to every bundle of goods
- we need to assume that are preferences are consistent (complete, reflexive, transitive)

Question 3

Ordinal Utility

Answer 3

we care about order, but not the value of the number

Question 4

Cardinal Utility

Answer 4

the numbers have some meaning (we don’t use this in class)

Question 5

Marginal Utility

Answer 5

the increased utility gained from consuming one more unit of a good.

Question 6

Diminishing Marginal Utility

Answer 6

as you consume increasing amounts, your utility goes up by smaller and smaller amounts

Question 7

Monotonic Transformations (two conditions)

Answer 7

1) Maintain order (we cannot invert the order)
2) Maintain shape (marginal rate of substitution/slope)

Question 8

Utility Function for Perfect Substitutes

Answer 8

U(x , y) = x + y
with constants: U(x , y) = ax + by
- a and b are some positive number that measures the “value” of goods
slope: -a/b

Question 9

Utility Function for Perfect Complements

Answer 9

U(x , y) = min{x , y}
with constants U(x , y) = min {ax , by}
- a and b are positive numbers that indicate the proportions in which the goods are consumed

Question 10

Utility function for Cob Douglas

Answer 10

U(x , y) = x^a y^b
Monotonic transfermation: U(x , y) = aln(x) + bln(y)

Question 11

Marginal Utility Function

Answer 11

MUx = (partial derivative)u (x,y) / (partial derivative)x