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For a utility function with perfect substitutes, the utility maximising bundle can be found by differentiation or simply by inspection. Suppose a consumer finds listening to Australian rock bands AC/DC and Tame Impala perfect substitutes. This means that they are happy to spend all afternoon listening to only AC/DC, or only Tame Impala, or ...
As an example, one's attitude toward ice cream may serve a utilitarian function because it is likely to be based on the reward (e.g., enjoyable taste) and punishments (e.g., weight gain) associated with ice cream and to guide behavior that maxims benefits while minimizing costs (e.g., eating low-fat ice cream) (Shavitt & Nelson, 2002 [7]).
In economics, an ordinal utility function is a function representing the preferences of an agent on an ordinal scale. Ordinal utility theory claims that it is only meaningful to ask which option is better than the other, but it is meaningless to ask how much better it is or how good it is.
In economics, utility is a measure of a certain person's satisfaction from a certain state of the world. Over time, the term has been used with at least two meanings. In a normative context, utility refers to a goal or objective that we wish to maximize, i.e., an objective function.
In decision theory, the von Neumann–Morgenstern (VNM) utility theorem demonstrates that rational choice under uncertainty involves making decisions that take the form of maximizing the expected value of some cardinal utility function. This function is known as the von Neumann–Morgenstern utility function.
The sign of the second derivative of a differentiable utility function that is cardinal, is the same for all the numerical representations of a particular preference structure. Given that this is usually a negative sign, there is room for a law of diminishing marginal utility in cardinal utility theory.
Standard utility functions represent ordinal preferences. The expected utility hypothesis imposes limitations on the utility function and makes utility cardinal (though still not comparable across individuals). Although the expected utility hypothesis is standard in economic modelling, it has been found to be violated in psychological experiments.
Standard consumer theory is developed for a single consumer. The consumer has a utility function, from which his demand curves can be calculated. Then, it is possible to predict the behavior of the consumer in certain conditions, price or income changes.