1.3 T1

Question 1

What does a utility function do, and definition?

Answer 1

It assigns a number to each possible consumption bundle so that a preferred bundle is assigned a higher number

Definition = a numerical score representing the satisfaction a consumer derives from a given basket

Question 2

What are ordinal utility functions?

Answer 2

Functions that tell ranking between two bundles, but no significance between bundles

Question 3

What are cardinal utility functions?

Answer 3

Utility functions that attaches significance to the magnitude of utility

Question 4

Transformation for an ordinal utility function?

Answer 4

A positive monotonic transformation can be applied without changing preferences

Question 5

Give an example of a positive monotonic transformation and explain it?

Answer 5

U(x,y)=x^2y^2
=(xy)^2
=U^2(xy) tf same preferences as U(x,y) = xy (see notes)

Question 6

Draw the following utility functions:
Quasi linear
Cohn Douglas

Answer 6

See notes

Question 7

See bottom of page 1 notes 1.3 (along an IC)

Answer 7

Now