Question

4. Why do economists use a utility function to present an economic agent's preference? Is this utility-based approach plausible?

Answer 1

Utility Theory is based upon the individual's preferences. While it is natural to think about preferences, it is often more convenient to associate different numbers to different goods. These numbers are called Utilities. In turn, a utility function dipicts the utility associated with each good x ∈ X, and is denoted by u(x) ∈ R. We say a utility function u(x) represents an agent’s preferences if : u(x) ≥ u(y) if and only if x < y

In economics, utility theory governs individual decision making.

Utility function

A utility function is able to represent those preferences if it is possible to assign a real number to each alternative, in such a way that alternative a is assigned a number greater than alternative b if, and only if, the individual prefers alternative a to alternative b. In this situation, an individual that selects the most preferred alternative available is necessarily also selecting the alternative that maximizes the associated utility function.