ECON2201 Chapter Notes - Chapter 4: Ordinal Utility, Utility, Indifference Curve
Document Summary
Utility function a way of assigning a number to every possible consumption bundle so more preferred bundles get a higher number than less preferred bundles. Ordinal utility only the ordering of utilities matters, not the magnitude. Monotonic transformation a way of transforming a set of numbers into another set of numbers in a way that preserves their order, or their utility. Examples are multiplication by a positive number, adding a number, raising u to an odd power, etc. Monotonic transformation always have a positive rate of change, measured by looking at the change in f between two values of u divided by the change in u. A monotonic transformation of a utility function is a utility function that represents the same preferences as the original utility function. If you draw multiple indifference curves, then draw a line starting at the origin through them, then they are monotonic if the origin line intersects every curve exactly once.
