ECON 20000 Lecture Notes - Lecture 7: Utility, Indirect Utility Function
Document Summary
Quasi-linear demand is convenient because utility is in the same units as the numeraire: each dollar spent on y gives one util utility is measured in dollars. In general utility is ordinal, so the units aren"t useful: the functions. U (x, y) = f (u (x, y)) represent the same preferences. We can convert each utility function to dollars, by measuring the cost of obtaining a given level of utility: let u be a well-behaved utility function that represents %. (x, y|px, py) = e (px, py,u (x, y)) also represents %: e(px, py, u) is increasing in u. Assuming u satis es monotonicity: is a monotonic transformation of u they represent the same preferences. So we can measure utility with money: issue: value of money depends on prices. (relates to purchasing power of money changing with prices). Hence - if prices change, money metric utility changes.
