The utility function is a significant concept in economics, and it measures preferences over a set of products and services. Utility represents the level of satisfaction gain from choosing and consuming a good or using a service (Gallego, 2017). The utility is measured in SI units called utils. Utility function levels the welfare or satisfaction of a customer as a function of consumption of goods. The theory is much used in reviewing rational choice to human behavior towards choosing certain products over others. Utility function also outlines the relationship between two goods and the choice option. Additionally, it represents an individual's fondness of good or services beyond its explicit monetary value.
Properties of utility Functions
The first property is nonsatisfaction. This means that there is a consistency with more being preferred to less. The implication of this factor illustrates that utility of more (X+1) pounds is always more than utility of less (X) pounds ("The Economic Properties of Utility Function - d42", 2019). Thus, in choosing the good for consumption, a customer will always wish that with the most significant expected satisfaction.
Secondly, an assumption of an investor’s chance to take a risk. This can be explained by reviewing three assumptions. They include;
· Risk aversion – this means that an investor will always go against making any fair gamble to a product distributed to a consumer.
· Risk – neutral investment – this is the position where an investor takes a fair gamble, and thus, there is a zero derivative towards the goods handled.
· Risk- seeking investment – means an investor will select a moderate chance in the goods handled.
Lastly is the assumption of investors changes of heart towards a particular product due to frequent fluctuation in wealth. If the number of resources on a product risked increases, the investor is assumed to take a step back from absolute risks ("The Economic Properties of Utility Function - d42", 2019). However, if the investment risk remains constant, it implies there is no change in wealth incurred on a product.
Gallego, L. (2017). Utility function | Policonomics. Retrieved 23 September 2019, from https://policonomics.com/utility/
The Economic Properties of Utility Function - d42. (2019). Retrieved 23 September 2019, from http://www.d42.com/portfolio/analysis/the-economic-properties-of-utility-function