Utility theory tries to expound on the behavior of people premised on the idea that individuals can continuously provide rank order with their choices depending on their preferences. Every individual will indicate separate preferences that are fundamentally intrinsic. The theory fundamentally attempts to explain the observed choices and behavior of individuals (Greco, Figueira & Ehrgott, 2016).
To start, make an assumption that a person faces a set of consumption “bundles.” It is assumed that the individuals possess well-cut preferences that allow them to rank order all the available bundles. The utility theory makes a number of assumptions. Some include; first, completeness whereby the can potentially rank order all possible bundles. Through rank-ordering, it is assumed that no matter the number of combinations of consumptions bundles is compiled before a person, each person can often rank depending on their preferences. The second assumption is based on rationality; where the preferences of individuals evade any sort of circularity. That is to imply; if more preference is made on bundle A compared to B and more preference is given to B than to C, then it implies that A is also preferred to C. At no circumstance will the person prefer C to A (Schumpeter, 2017). Another assumption is that Mix-is-better. In mix-is-better assumption concerning preferences asserts that a mix of two; for instance, half of clothing and half of food will be preferred to the stand-alone kind of choices. Additionally, More-is-better is also an assumption that works well with utility theory, but can easily be resolved.
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In conclusion, it can be noted that utility theory rests upon the concept that individuals behave as if they come-up with decisions by assigning imaginary to the original financial figures. The theory operates on a number of assumptions. That include; completeness, more-is-better, rationality, and mix-is-better.
References
Greco, S., Figueira, J., & Ehrgott, M. (2016). Multiple criteria decision analysis . New York: Springer.
Schumpeter, J. A. (2017). Theory of economic development . Routledge.
