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Define utility. When can it be negative? |
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Answer» A utility function can certainly be negative. The utility function isnothing more than a way to represent a preference relationship.This is an important conceptual point. In several theorems that typically show up in introductory texts, we show that sets of preferences that satisfy certain regularity conditions can be represented as utility function. Also, there are different decision theory frameworks that allow the utility function to be transformed. You alluded to something like this in your question. In the traditional framework without uncertainty, the utility function is defined up to a monotonic transformation. Under certain kinds of uncertainty, we get Von Neumann–Morgenstern utility functions that are unique up to affine transformations. You can read more about this elsewhere. For now, the consider the following definition of a utility function. It is taken fromAdvanced Microeconomic Theoryby Jehle and Reny (3rd edition) |
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