State and explain the Cardinal Utility Theory Assumptions

Answers

a) Rationality
The consumer is assumed to be rational. i.e. he aims to maximize his utility subject to the budget constraint

b) Cardinality
That the utility of each commodity is measurable. Utility is a cardinal concept; the most convenient way of measurement is monetary terms. This is the amount of money that the consumer is willing to pay for an additional unit of a commodity.

c) Constant Marginal Utility
This assumption is necessary when money is used as a measurement of utility, the essential feature of a standard unit of measurement is that it should be constant. Therefore if the marginal utility of money changes as income increases (or decreases) the measuring rod for utility becomes like an elastic ruler, hence becoming inappropriate for measurement.

d) Diminishing Marginal Utility
The utility gained from successive units of a commodity diminishes. i.e. the marginal utility of a commodity diminishes as the consumer acquires larger quantities of it. This is the axiom of diminishing marginal utility.

e) Total utility of a basket of goods depends on the quantities of the individual commodities. If there are n commodities in the bundle with quantities x₁, x₂, x₃,………,x_n the total utility is;
U=f( x₁,x₂,x₃,.....,x_n )

Wilfykil answered the question on March 20, 2019 at 07:35

Next: Define the term climax ecosystem.
Previous: Elaborate on the concept of an Ecological niche.

View More Intermediate Microeconomics Questions and Answers | Return to Questions Index

State and explain the Cardinal Utility Theory Assumptions

Answers

Exams With Marking Schemes

Related Questions