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Finding (,) is the utility maximization problem. If u is continuous and no commodities are free of charge, then x ( p , I ) {\displaystyle x(p,I)} exists, [ 4 ] but it is not necessarily unique. If the preferences of the consumer are complete, transitive and strictly convex then the demand of the consumer contains a unique maximiser for all ...
Standard utility functions represent ordinal preferences. The expected utility hypothesis imposes limitations on the utility function and makes utility cardinal (though still not comparable across individuals). Although the expected utility hypothesis is standard in economic modeling, it is violated in psychological experiments.
In philosophy, Pascal's mugging is a thought experiment demonstrating a problem in expected utility maximization. A rational agent should choose actions whose outcomes, when weighted by their probability, have higher utility. But some very unlikely outcomes may have very great utilities, and these utilities can grow faster than the probability ...
For instance, from the example above in economics, if the maximal utility of two goods is achieved when the quantity of goods x and y are (−2, 5), and the utility is subject to the constraint x and y are greater than or equal to 0 (one cannot consume a negative quantity of goods) as is usually the case, then the actual solution to the problem ...
It is a solution to the utility maximization problem of how the consumer can maximize their utility for given income and prices. A synonymous term is uncompensated demand function , because when the price rises the consumer is not compensated with higher nominal income for the fall in their real income, unlike in the Hicksian demand function .
Neoclassical economics uses the utility theory of value, which states that the value of a good is determined by the marginal utility experienced by the user. This is one of the main distinguishing factors between neoclassical economics and other earlier economic theories, such as Classical and Marxian , which use the labor theory of value that ...
This is the expected utility hypothesis. As stated, the hypothesis may appear to be a bold claim. The aim of the expected utility theorem is to provide "modest conditions" (i.e. axioms) describing when the expected utility hypothesis holds, which can be evaluated directly and intuitively:
There are two main standards of thought on economic efficiency, which respectively emphasize the distortions created by governments (and reduced by decreasing government involvement) and the distortions created by markets (and reduced by increasing government involvement).