Elaborate on The Utility Function

A utility function is a way of assigning a number to every possible consumption bundle such that more preferred bundles get assigned larger numbers than less preferred bundles. A utility function is a way to label indifference curves. Since every bundle of an IC must have the same utility, a utility function is a way to assign number to the different indifference curves in a way tat higher ICs get assigned larger numbers. As long as ICs containing more preferred bundles get a larger label than indifference curves containing less preferred bundles, the labeling will represent the different preferences.
However, not all kinds of preferences can be represented by a utility function for example, suppose a consumer had intransitive preferences so that A > B > C > A. Then a utility function for these preferences would have to consist of numbers U(A), U(B) and U(C) such that U(A) >U(B) > U (C) U(A), which is impossible.
There are two approaches to the problem of comparison of utility; - Cardinalist Approach and the Ordinalist Approach

-The Cardinalist school of thought postulates that utility is measurable. Various suggestions have been put forward for the measurement of utility. Under certainty i.e. complete knowledge of the market conditions and income over the planning period, some economist have suggested that utility can be measured in monetary terms, by the amount of money the consumer is willing to sacrifice for an additional unit of the commodity. Others have suggested the measurement of utility using subjective units called utils.
-The Ordinalist school postulated that utility is not measurable, but is an ordinal magnitude. That the consumer needs not to know in specific units the utility of various commodities to make his choice. It is sufficient for him/her to be able to rank the various baskets of goods, according to the satisfaction that each bundle gives him. He should be able to determine the order of preference among the different goods. The main ordinal approach theories are the indifference curve and revealed preference theories.

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Wilfykil answered the question on March 20, 2019 at 07:16