Utility Function (von Neumann & Morgenstern, 1944): A mathematical representation of a consumer’s preferences, assigning a real number to each option such that higher numbers indicate more preferred options, enabling analysis of choice behavior.
Completeness and Transitivity (Arrow, 1951): Assumptions that preferences are complete (for any two options, the consumer can state a preference or indifference) and transitive (if A is preferred to B, and B to C, then A is preferred to C), ensuring preferences can be represented by a utility function.
Expected Utility Theory (Bernoulli, 1738): A model where consumers maximize the expected utility of uncertain outcomes, capturing the idea that utility, not monetary value, guides decision-making under risk.
Willingness-to-Pay (WTP): The maximum amount a consumer is willing to pay for an additional unit of a good, interpreted as the marginal utility of that good in quasilinear utility models.
1. What is consumer utility maximization?
2. Who formalized the utility function in the context of expected utility theory in 1944?
3. What is the primary role of utility measurement and indifference in consumer decision-making?
Utility Function — definition?
Mathematical representation of preferences, assigning real numbers.
Completeness & Transitivity — role?
Ensure preferences can be represented by a utility function.
Expected Utility — purpose?
Evaluate risky prospects using probability-weighted utility.
Willingness-to-Pay — meaning?
Maximum amount a consumer is willing to pay for an additional unit.
Marginal Utility — what?
Additional utility from consuming one more unit.
Quasilinear Utility — form?
U(q, t) = V(q) + t, separating good and money.
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