BUSF_A01.qxd

Utility theory

Figure 6.2
Utility of going
away on holiday
for a particular
individual

All points along the curve UU represent combinations of days of holiday and money used

up that could generate equal amounts of utility. For example, spending ZS to get 0T days of

holiday, represented by point V, would yield exactly as much satisfaction, to this individual,

as would spending XS to get 0W days of holiday, represented by point Y.

spend more money on extra days. It is important to recognise that the curve depicted

applies only to this individual and reflects his or her personal tastes; any other indi-

vidual may see things very differently – perhaps even not liking being away from

home very much and so being unwilling to devote any money to it.

For the individual whose preferences are depicted in Figure 6.2, all points along the

curve UU represent combinations of days away on holiday and money retained that

will give equal satisfaction. Thus points V and Y on curve UU represent just two of the

many combinations of days of holiday and money retained that would be of equal

satisfaction or utility to our individual. This person would view having 0T days of

holidays and retaining 0Z of money as equally satisfying to going on holiday for 0W

days, leaving only 0X of money. The person would be indifferent as to which of these

two combinations, or indeed of any other combinations lying along curve UU, were to

be taken.

Higher levels of satisfaction

Figure 6.3 shows the same combinations of days of holiday and money retained but

at varying levels. Each of the curves U 1 U 1 , U 2 U 2 , U 3 U 3 and U 4 U 4 of themselves show

combinations that yield equal satisfaction or utility, but the higher the curve, the

higher the level of utility. For example, any point along U 2 U 2 is more satisfactory than

any point along U 1 U 1 for our individual. This is because, at any level of spending,

more days of holiday could be taken; or, at any number of days of holiday, the inroads

into the person’s cash resources would be smaller. For example, if PS of money were