ECO200Y1 Lecture Notes - Lecture 12: Marginal Product, Marginal Revenue, Classic Case
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Preferences: people are making choices over different lotteries; this means people have preferences over different lotteries. Expected utility: preferences over lotteries are built directly out of preferences over the outcomes; agents care about the attributes of the lotteries only because of how their utility function over sure outcomes evaluates those outcomes. =>when two agents make different choices over lotteries, it tells us something about their utility function over sure outcomes. Note: a person utility function does not have to be always one or the other you could be risk loving over small amounts of money but risk averse over large amounts, for example. The shape of utility function is concave. (e. g. )) >the connecting line the function lies below the function. The marginal utility is decreasing: more money is better at a decreasing rate. >because this person has a decreasing marginal utility, he prefers to choose for sure. The shape of utility function is linear. (e. g. u(x)=3x+10)
