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Utility maximization is an important concept in consumer theory as it shows how consumers decide to allocate their income. Because consumers are modelled as being rational , they seek to extract the most benefit for themselves.
In economics, utility is a measure of a certain person's satisfaction from a certain state of the world. Over time, the term has been used with at least two meanings. In a normative context, utility refers to a goal or objective that we wish to maximize, i.e., an objective function.
In order to compare the different decision outcomes, one commonly assigns a utility value to each of them. If there is uncertainty as to what the outcome will be but one has knowledge about the distribution of the uncertainty, then under the von Neumann–Morgenstern axioms the optimal decision maximizes the expected utility (a probability ...
In decision theory, the von Neumann–Morgenstern (VNM) utility theorem demonstrates that rational choice under uncertainty involves making decisions that take the form of maximizing the expected value of some cardinal utility function. This function is known as the von Neumann–Morgenstern utility function.
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 ...
The expected utility hypothesis is a foundational assumption in mathematical economics concerning decision making under uncertainty. It postulates that rational agents maximize utility, meaning the subjective desirability of their actions. Rational choice theory, a cornerstone of microeconomics, builds this postulate to model aggregate social ...
The utility functions may represent their chance of recovery – () is the probability of agent to recover by getting doses of the medication. The utilitarian rule then allocates the medication in a way that maximizes the expected number of survivors.
U ni is the utility (or net benefit or well-being) that person n obtains from choosing alternative i. The behavior of the person is utility-maximizing: person n chooses the alternative that provides the highest utility. The choice of the person is designated by dummy variables, y ni, for each alternative: