The financial encyclopedia uses cookies to improve your user experience. Find out more here!



 

 


 

Utility function
 

 

A function that can either be the actual evaluation of an individual’s ’utility or an economist’s convenient representation of an individual s preferences. There is in principle no reason why an individual cannot evaluate the utility of different outcomes using a utility function. If they do, then the first interpretation applies. Note that ‘an individual’ can be broadly interpreted to include organizations, and an organization may employ a utility function to guide its decision-making. Economists employ utility functions as a convenient representation of preferences that permits mathematical analysis. A utility function represents a set of preferences if the function has a higher value for consumption bundle jc than for consumption bundle y if, and only if, x is preferred to y. The restrictions that must be placed on preferences to ensure a utility function exists that represents them are very weak. Moreover, a rational individual will act as if they maximize the utility function.

 

Reference: Oxford Press Dictonary of Economics, 5th edt.