3
$\begingroup$

I am considering a utility function over a single good for an intertemporal allocation problem. The class of power utility functions $$ u(x) = \frac{x^\gamma}{\gamma} $$ where $\gamma < 1$, $\gamma \neq 0$ has derivative $$ u'(x) = x^{\gamma-1} $$ and thus satisfies $$ \lim_{x \to 0} u'(x) = \infty\ . $$ This makes sense to me intuitively: if I am not consuming anything at all, the marginal utility I gain from increasing my consumption even a little bit will be unbounded.

I would like to know if this holds in general. That is, can an argument be made that marginal utility must be unbounded at zero for every (single-good) utility function? References are appreciated.

$\endgroup$
1
  • $\begingroup$ The intuition of never having 0 consumption is more likely to hold when considering a composite good than some particular good. Which is ofte the case in intertemporal problems. $\endgroup$ Commented Jul 12 at 15:48

1 Answer 1

3
$\begingroup$

The reason for using a power utility function is typically not that it fits some intuition (and I also don't think this intuition is particularly convincing). It is rather that these utility functions satisfy the Inada conditions and thus equations of the form $u'(x)=c$ have a unique solution for all $c>0$. So it's an assumption made mostly for convenience and simplicity.

$\endgroup$
1
  • $\begingroup$ Thanks, but this doesn't really answer my question. I would like to understand if unbounded marginal utility at $0$ consumption is a reasonable boundary condition in general, since I would like to use this property in another context. $\endgroup$
    – Anthony
    Commented Jul 18 at 8:15

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.