8/24/23, 10:37 PM AEA Mentoring Advancing Diversity

In the provided story, the concept of utility functions in economics is explored. Utility functions
represent how much satisfaction or "utility" a consumer gets from consuming different combinations
of goods. When trying to optimize or maximize utility within a budget, economists use derivatives to
determine how utility changes when the quantity of one good changes, keeping all else constant. This
rate of change is called the marginal rate of substitution (MRS), which essentially captures the trade-
off a consumer is willing to make between two goods. If the MRS is decreasing (with a negative
derivative), it suggests the consumer is willing to trade fewer units of one good for an additional unit
of another as they consume more of that good. In the given examples, different utility functions are
presented, and their MRS is calculated. If the utility function is "well-behaved" (having a decreasing
MRS), it simplifies the optimization process. On the contrary, if the utility function doesn't have this
characteristic, it might not be straightforward to find the optimal consumption bundle. The story also
mentions total differentiation, which is a technique to capture how a function changes with respect to
two variables simultaneously. Finally, the concept of "convexity" of utility functions is discussed, as it
helps determine the shape of "indifference curves" (curves that show combinations of goods giving
the same level of satisfaction).

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