Economics of agro-food safety and international market for agro-food products and legislation Antonio Stasi

INDEX Utility Utility…lets talk in math terms Utility…basics of comparative statics Utility and policy How to measure utility

Utility What is? If it is adimensional, How it is used? Adimensional Measure of Consumers’ Satisfaction If it is adimensional, How it is used? Used to make consumers among consumers (only if measured always in the same way) What we need to know: How can I practically use it for policy/managerial purposes

Utility The RATIONALE behind utility refers to the HEDONISTIC principle Consumers behave rationally and selfishly (egoistically), maximizing their own satisfaction Which are the determinants of utility? Which are the cause of utility? What could potentially change the level of utility a consumer achieves?

max(U) = max(Quality,Quantity) subject to: Y = sum(pq) Utility We can say that individuals choose to buy/eat/consume a product when utility is at its maximum level given the budget constraint Utility is max when the perceived quality is max and the quantity is also max….depending on the budget…of course max(U) = max(Quality,Quantity) subject to: Y = sum(pq)

max(U) = max(Quality,Quantity) subject to: Y = sum(pq) Utility max(U) = max(Quality,Quantity) subject to: Y = sum(pq) Utility Budget Constraint Max U for that person Quality

Utility…lets talk in math terms If Utility is assumed to be a linear function of quality and quantity… U = a1Qt + a2Qual Because of Lagrange Theory, budget constraint can be included into the equation, giving rise to… U = a1Qt + a2Qual - bP

Utility…basics of comparative statics How much utility would increase if budget increases by 1 euro (unit)? By means of the partial derivative with respect to price, we have ∂U/ ∂P = -b How much utility would increase if quality increases by 1 unit? ∂U/ ∂Q = a

Utility…basics of comparative statics TRADE-OFF How much should I increase quality if I increase the price and I want to keep people buying my product? If an individual already buys, Utility is max Utility was already maximized initially, when for example Qual = 1 and Price =1 U = a1 – b 1

Utility…basics of comparative statics What if I want to increase price to 2? How much should I increase quality to keep consumer’s utility at the max level? Umax = a1 – b 1 now a(Q?) – b 2 therefore a1 – b 1 = a(Q?) – b 2 hence Q? = (a+b)/a So I would increase quality from 1 to Q?

Utility…basics of comparative statics What if I want to produce higher quality (from 1 to 2) products? How much should I ask consumers to pay? Umax = a1 – b 1 now a(2) – b P? therefore a1 – b 1 = a2 – b P hence P? = (a+b)/b So, if quality goes from 1 to 2, I would increase price from 1 to P?

Utility…basics of comparative statics This concept keeps the name of WILLINGNESS TO PAY for an increase of quality (WTP) “a” measures consumers’ perception of quality “b” measures consumers’ sensitivity to price changes

Utility and Policy Quality can be intended in various ways Organoleptic quality Level of information provided to consumers (labeling) Level/Presence of some ingredients (sulfites in wine, genetically modified ingredients…, level of fiber, level of alcohol…) Combination of product attributes The evaluation of utility could be used for understanding the best policy

How to measure Utility E.g. take more than one product with fixed characteristics Ask people: Ranking/Ordering Say which is the first choice for you, the second, the least Scoring Assign a score for each product Choice Probability Which one among those is your effective choice?

How to Measure Utility The following measure are reliable approximation for Utility Ranking/Ordering Scoring Choice Probability U = Prob = Rank = Score

How to measure Utility Remember the equation? U = aQual - bP For the moment we have U How about Qual and P? Those are observable characteristics we can see on the shelves How about a and b?

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