![]() ![]() As you have checked the box "I want to use a utility function.", you will be presented with a utility function editor. Now, if we plot this expression for various "a" value as "a" = 1, "a" = 10, "a" = 50, "a" =100, we observe a pattern.Ĭlick Proceed. We will show how to calculate this constant in this tutorial. You can fine-tune this value "a" to match someone's net wealth and model his/her utility function. This "a" value can be anything to reflect a specific person's situation. In our expression, we introduced a proportional constant "a". That is the idea of marginal utility of the Bernoulli Utility Function. but, when the net wealth is very low, the extra 1$ gets much more exciting. ![]() So, you can understand that the more wealth is gained, the temptation to get an extra 1$ gets diminished. How much excited will you feel? Not sure about everyone, but most rational people will feel the "0" temptation to get that 1$ when the 100,000$ he or she has in his/her pocket. If you get 1$ on top of that your net wealth will be 100,001$. Now, say, you have 100,000$ in your pocket. Say, you have 50$ in your pocket, how much more excited will you feel if you just get 1$ (so your total wealth will be 51$)? hmm, maybe someone will be somewhat excited. So, here, we used the differential operator. If you are familiar with calculus, then you know that differential operation is the math operation that gives us any expression's rate of change. Marginal utility is an expression of how the Utility value changes for each additional unit of gain. ![]()
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