Preferences and utility theory are critical concepts in microeconomics, explaining household decision-making behavior. Preferences refer to how households make choices necessary to satisfy their needs when comparing bundles of goods. Utility theory uses mathematical concepts to express these preferences and elucidate household satisfaction levels. Rational preferences must meet completeness, transitiveness, continuity, convexity, and monotonousness. Various preferences exist, including substitutes, complements, perfect and imperfect substitutes, and perfect compliments. Preference and utility theory ultimately help derive the formal opportunity costs of alternatives in household theory.

Rational Decision under Uncertainty

By James E Njoroge, M. Sc. (VWL) - Economic Coach, Consultant and Lecturer / November 8, 2021 / Foundations of Economics, Behavioral Economics, Economics, Economics of Pandemics, Health risks, Leadership and Management, Personal Finance

Rational Decision under Uncertainty Read Post »

How would an individual make a rational decision under uncertainty? This article explains how economists characterize decision-making under uncertainty. Economic models always focus first on decisions under certainty and then introduce uncertainty later in the learning process. The focal point here is how this affects the rationality of agents’ decisions to use scarce resources. 1. Introduction to Rational Decision under Uncertainty We are all faced with daily situations where we have to make decisions that will lead to different outcomes immediately or later. Such decisions occur under uncertainty of results. Economic theory explains this problem in the models of decision-making

Certainty Equivalent, Expected Value, Fair Insurance, Fairness, Insurance Premium, Rational, Rational Decision, Risk, Risk Premium, Uncertainty, Unfair Insurance

Preferences and Utility Theory

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