Download presentation

Presentation is loading. Please wait.

Published byAnnie Griggs Modified over 2 years ago

1
Chapter 4 Utility Functions

2
Utility Ordinal Utility: The only property of a utility assignment is “how it orders the bundles of goods.” The size of the utility difference between two bundles does not matter. Cardinal Utility: It attaches a significance to the magnitude of utility. The size of the utility difference between two bundles has some sort of significance.

3
04.01

4
Panel A: A monotonic transformation Panel B: non-monotonic transformation since it sometime decreases.

5
04.02

6
The utility function can be represented by a general function: u=f(x1, x2)

7
04.03

8
Quasi-linear Utility Function: U=x1+v(x2)=x1+ln(x2)

9
04.04

10
The Cobb-Douglas Utility Function U=(x1)^c (x2)^d where ^ represents the superscript Note: goods are imperfect substitutes

11
04.05

12
Other Utility Functions: Leontief Function: u=min[a*x1, b*x2] (perfect complements) Linear Function: u=a*x1+b*x2 (perfect substitutes) Lexicographic Preference: A is preferred to B if (I) x1(A) > x1(B) or (ii) x1(A)=x1(B) but x2(A)>x2(B).

13
Leontief Function x1 x2 Examples: (1) Left and right shoes (2) coffee and sugar

14
Linear Function x1 x2 Example: yellow and red pencils (assuming that colors are not your concern)

15
Lexicographic Function x1 x2.. B A A is inferior to B Example: x1 (health) x2 (money) for a terminally ill patient

16
Marginal Utility Definition: Effect on utility with a little more of good 1 Formally, MU1=dU/dx1=[u(x1+dx1, x2)- u(x1, x2)]/dx1

17
MRS The rate at which a consumer is just willing to substitute a small amount of good 2 for good 1. Formally, MRS=MU1/MU2=[dU/dx1]/[dU/dx2], i.e., marginal utility ratio. This is nothing but the slope of the indifference curve Given strict convexity assumption, MRS diminishes as we move down along a indifference curve

18
This concludes the Norton Media Library Slide Set for Chapter 4 Intermediate Microeconomics 6 th Edition by Hal R. Varian W. W. Norton & Company Independent and Employee-Owned

Similar presentations

Presentation is loading. Please wait....

OK

Chapter 4 UTILITY.

Chapter 4 UTILITY.

© 2017 SlidePlayer.com Inc.

All rights reserved.

Ads by Google

Ppt on struts framework in java Ppt on event driven programming vs procedural programming Ppt on life history of robert hooke Ppt on solar energy and its uses Ppt on endangered animals of india Ppt on payroll in tally Ppt on chapter 12 electricity Ppt on life of gautama buddha Download ppt on transportation in animals Seven segment led display ppt on tv