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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.
The utility function u(c) is defined only up to positive affine transformation – in other words, a constant could be added to the value of u(c) for all c, and/or u(c) could be multiplied by a positive constant factor, without affecting the conclusions. An agent is risk-averse if and only if the utility function is concave.
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.
A single-attribute utility function maps the amount of money a person has (or gains), to a number representing the subjective satisfaction he derives from it. The motivation to define a utility function comes from the St. Petersburg paradox: the observation that people are not willing to pay much for a lottery, even if its expected monetary gain is infinite.
A multi-utility representation (MUR) of a relation is a set U of utility functions, such that : (). In other words, A is preferred to B if and only if all utility functions in the set U unanimously hold this preference. The concept was introduced by Efe Ok.
In economics and consumer theory, quasilinear utility functions are linear in one argument, generally the numeraire. Quasilinear preferences can be represented by the utility function u ( x 1 , x 2 , … , x n ) = x 1 + θ ( x 2 , … , x n ) {\displaystyle u(x_{1},x_{2},\ldots ,x_{n})=x_{1}+\theta (x_{2},\ldots ,x_{n})} where θ {\displaystyle ...
E.g., the commodity is a heterogeneous resource, such as land. Then, the utility functions are not functions of a finite number of variables, but rather set functions defined on Borel subsets of the land. The natural generalization of a linear utility function to that model is an additive set function.
A subadditive function is a function:, having a domain A and an ordered codomain B that are both closed under addition, with the following property: ,, (+) + (). An example is the square root function, having the non-negative real numbers as domain and codomain: since ∀ x , y ≥ 0 {\displaystyle \forall x,y\geq 0} we have: x + y ≤ x + y ...