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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 economics, a utility representation theorem shows that, under certain conditions, a preference ordering can be represented by a real-valued utility function, such that option A is preferred to option B if and only if the utility of A is larger than that of B.
This means that in both equilibria, all agents have exactly the same budget set (they can afford exactly the same bundles). In equilibrium, the utility of every agent is the maximum utility of a bundle in the budget set; if the budget set is the same, then so is the maximum utility in that set. b. The price vectors are not proportional.
In economics, a cardinal utility expresses not only which of two outcomes is preferred, but also the intensity of preferences, i.e. how much better or worse one outcome is compared to another. [ 1 ] In consumer choice theory , economists originally attempted to replace cardinal utility with the apparently weaker concept of ordinal utility .
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.
Examples of alternatives to utility maximisation due to bounded rationality are; satisficing, elimination by aspects and the mental accounting heuristic. The satisficing heuristic is when a consumer defines an aspiration level and looks until they find an option that satisfies this, they will deem this option good enough and stop looking.
Another way to think of the term marginal is the cost or benefit of the next unit used or consumed, for example the benefit that you might get from consuming a piece of chocolate. The key to understanding marginality is through marginal analysis. Marginal analysis examines the additional benefits of an activity compared to additional costs ...
An additive utility function is characteristic of independent goods. For example, an apple and a hat are considered independent: the utility a person receives from having an apple is the same whether or not he has a hat, and vice versa. A typical utility function for this case is given at the right.