Microeconomics Utility Concepts

This set of flashcards covers key concepts and definitions related to utility in microeconomics, including concepts of ordinal and cardinal utility, marginal utility, and different types of utility functions.

Utility

A utility function assigns numerical values to bundles, representing preferences numerically; only ranking matters (ordinal).

Ordinal Utility

Only the order of preferences matters, used in microeconomics.

Cardinal Utility

Assumes intensity of preferences, where a utility of 10 is considered twice as good as a utility of 5.

Marginal Utility (MU)

Measures the small change in utility from a tiny increase in a good, holding others constant.

Marginal Rate of Substitution (MRS)

The rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility.

Cobb-Douglas MRS

For utility function U = x1^a x2^b: MRS = (a/b)(x2/x1), which diminishes as x1 increases.

Perfect Substitutes Utility

Utility function U = 2x1 + x2, leading to constant MRS and corner solutions.

Perfect Complements Utility

Utility function U = min(2x1, x2) where goods are used in a fixed ratio; utility rises only if both increase in that ratio.

Quasi-linear Utility

Utility of the form U(x1,x2) = v(x1) + x2; linear in one good where ICs are parallel shifts.

Consumer Equilibrium Condition

At interior optimum, MRS equals the price ratio, p1/p2.

Finding Optimal Bundle

Use Lagrangian method to find the optimal consumption bundle by setting up FOCs.

Homothetic Preferences

Preferences where MRS depends only on the ratio x1/x2 and ICs are scaled versions.

Quasi-concavity of Utility

Implies convex preferences; averages yield at least as much utility as extremes.

Monotonic Transformations

Used in solving utility problems to simplify representations without changing the optimal bundle.

Indifference Curves (ICs) Relationship

Each utility level corresponds to an IC, and the collection of ICs represents the utility function's geometric picture.

Utility Maximization Intuition

Consumers aim to pick the highest IC that touches their budget line, achieving utility maximization.

Cobb-Douglas Demand Shortcut

For U=x1^a x2^b, the demand functions are x1=(a/(a+b))(m/p1) and x2=(b/(a+b))(m/p2).

Income Effects on Utility

When income increases, consumers move to higher ICs, with both goods increasing for normal goods.

Utility Problem Checklist

1) Identify utility type. 2) Compute MU1,MU2. 3) Set MU1/p1=MU2/p2. 4) Plug into budget. 5) Check corner/interior. 6) Graph & interpret.