# Tag Info

6

I think the Investopedia article does not use clear terminology which leads to confusion. In Economics, utility can be split across two categories as ordinal and cardinal utility. In the case of ordinal utility assigning numeric values is meaningless. For example, if A is proffered to B, assigning 200 utils to A and 100 utils to B is meaningless because that ...

4

Utility functions as ordinarily used are not a measure of well-being comparable among people, but a representation of preferences. Moreover, preferences could principally be elicited from choice experiments. A utility function assigns real numbers to alternatives so that one alternative is preferred to the other if and only if it is assigned a higher number. ...

4

$u = \max(x, y)$ represents the preferences over two substitute goods that cannot be consumed together. For example - tea and coffee. In the event that the consumer gets x quantity of tea and y quantity of coffee, consumer choose to consume only one of the them depending on the quantity. He always choose the one that is offered in larger quantity and throws ...

3

Your thinking is correct that, in some ways, $x_1, x_2$ are substitute goods. We define substitute goods which have the following property: $$\left.\frac{\partial x_i}{\partial p_j}\right|_{u=\bar u}>0$$ The case of $U(x_1,x_2)=\max\{x_1,x_2\}$ is that of a boundary solution as the indifference curves are now concave to the origin. So equilibrium solution ...

2

This is trivially not true. Consider simple example of utility: $$u(x) = x^{1/2}$$ Expected utility $E(u(x)) = E[x^{1/2}]$ Inverse utility is $u^{-1} \implies x = u^2$ clearly generally $E(u) \neq u^{-1}$.

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There are no simple methods for estimating cardinal utility (ordinal utility would be a different matter - you could just observe few of your choices). This is not because cardinal utility would necessary be unmeasurable. Although this is not completely settled question (see Moscati (2018) Measuring Utility: From the Marginal Revolution to Behavioral ...

2

Yes. In general not. Let's say the individual has initial wealth $W$ and the gamble $g$ has payouts $0$ and $G$, each with probability $1/2$. As you say, the certainty equivalent $C$ of the gamble is the amount $C$ with $$u(W+C)=(u(W)+u(W+G))/2.$$ Now the same individual would be willing to pay at most $P$ to enter the gamble, where u(W)=(u(W-P)+u(W+G-P))/...

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If you assume that agents' utility functions over pairs $(x,t)$ of consumption bundles $x$ and monetary transfers $t$ are quasilinear in money, $u_i(x,t)=v_i(x)+t$, then $v_i(x)$ measures $i$'s WTP for $x$. In a utilitarian framework the sum of utilities is then a social welfare function satisfying Arrow's axioms (apart from universal domain of course) and ...

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