Managerial Economics and Strategy, 2/e

4.2 Utility

Underlying our model of consumer behavior is the belief that consumers can compare various bundles of goods and decide which one gives them the greatest pleasure or satisfaction. It is possible to summarize a consumer’s preferences by assigning a numerical value to each possible bundle to reflect the consumer’s relative ranking of these bundles.

Following Jeremy Bentham, John Stuart Mill, and other nineteenth-century British economist-philosophers, economists apply the term utility to this set of numerical values that reflect the relative rankings of various bundles of goods. The statement that “Lorna prefers Bundle x to Bundle y” is equivalent to the statement that “consuming Bundle x gives Lorna more utility than consuming Bundle ...