Utility

Utility

U(x,y)

Perfect Substitutes formula

U(x,y) = Ax + By

True or false

if x and y are perfect substitutes, then U(x,y) = Ax + By

True

Define the letter highlighted in green: 

The Marginal Utility

Define A

The added satisfaction (u) form consuming 1 more x

Define B

The added satisfaction (u) form consuming 1 more y

Define A/B

MU_x/MU_y

What does MUx/MUy mean?

The Marginal Rate of Satisfaction

Meaning

The exchange rate of x:y in terms of satisfaction

Order the bundles in order of preference

C > B > A

MRS (perfect substitutes) = 

1/1, which equal A/B (a constant)

If MRS is constant:

then variety does not matter, ONLY volume.

Indifference Curves

lines which connect all bundles that give a particular level of utility

which graph is this?

Perfect Substitutes

which graph is this?

Perfect Compliments

which graph is this?

Cobb-Douglas

Perfect Compliments formula:

U(x,y) min(Ax,By)

Cobb-Douglas formula

U(x.y) = x^αy^β

True or false

α + β ≠ 1

False, α + β = 1

Cobb-Douglas MRS formula: