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Preferences, utility functions and Yootles

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How much of the public good will be produced and by whom?

Yootles.com is the resource.

See attached file for full problem description.

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Solution Preview

1) Preferences are an important concept in economics, and they can be represented with utility functions. Let X be the consumption set, the set of all mutually-exclusive packages the programmers could conceivably produce (such as an indifference curve map without the indifference curves). The programmers' utility functions rank each package in the consumption set. If u(x) > u(g) the programmers strictly prefer x to g.

The utility function in this case isn't linear, indicating that the slope changes from one value of x to another. Note that the exponents on the utility function in this problem indicate that the programmers value X more than g. You will need to use some calculus to determine the solution to this problem numerically. You can see this by asking, for example, should I spend this next dollar on pizza or ice cream? If I spend the dollar on pizza, how much extra pizza can I get? (Let's say l/8 extra pizza.) And if I consume ...

Solution Summary

Use of a local currency to determine preferences is provided in the solution.