#### Subject 1. Utility Theory

Utility refers to the total satisfaction received by a person from consuming a good or service.

• Completeness. A person can compare any two bundles, A and B, in such a way that it leads to one of the three following results: (i) A is preferred to B, (ii) B is preferred to A, or (iii) A and B are the same (they are indifferent).
• Transitivity. Consider any three bundles A, B, and C. If a person prefers A to B and also prefers B to C, she or he must prefer A to C.
• Nonsatiation. Consider two bundles, A and B. A has more than B in every commodity and yet all these commodities are not economic "bads"; then a person will rank A higher than B.

Utility theory is a quantitative model of consumer preferences and is based on the above axioms. Consumer preferences can be represented by an ordinal utility function: This is a mathematical expression that shows the relationship between utility values and every possible bundle of goods.

This ordinal - not cardinal - utility captures only ranking and not strength of preferences.

#### Practice Question 1

A person can compare any two bundles using the utility theory. This refers to the axiom of ______.

A. completeness
B. transitivity
C. nonsatiation

This axiom of completeness does not permit a person to say, "I just cannot decide."

#### Practice Question 2

A person who is indifferent between A and B and is also indifferent between B and C must be indifferent between A and C.

A. This assumption is referred to as the axiom of transitivity.
B. This assumption violates the axiom of transitivity.
C. This assumption has nothing to do with the axiom of transitivity.

The axiom of transitivity holds for indifference and strict preference.

#### Practice Question 3

Which axiom means "the more, the better"?

A. The axiom of completeness
B. The axiom of transitivity
C. The axiom of nonsatiation