Podcast
Questions and Answers
Which assumption is made by cardinal utility theory?
Which assumption is made by cardinal utility theory?
- The total utility of a basket of goods depends on the quality of individual commodities
- The marginal utility of money is constant (correct)
- Consumers are irrational
- The utility of each successive unit of a commodity increases
What is the main difference between cardinal and ordinal utility theory?
What is the main difference between cardinal and ordinal utility theory?
- The focus on maximizing satisfaction
- The concept of diminishing marginal utility
- The assumption of consumer rationality
- The way utility is measured (correct)
What is the objective of the consumer according to utility theory?
What is the objective of the consumer according to utility theory?
- To maximize satisfaction (correct)
- To maximize income
- To minimize expenses
- To minimize utility
Flashcards
Cardinal utility theory assumption
Cardinal utility theory assumption
The marginal utility of money is constant.
Cardinal vs. Ordinal Utility
Cardinal vs. Ordinal Utility
Cardinal utility measures utility with specific numbers, while ordinal utility ranks preferences.
Consumer's Objective
Consumer's Objective
To maximize their satisfaction or overall utility.
Study Notes
- There are two approaches to measure consumer's utility: cardinal and ordinal.
- Cardinal utility theory postulates that utility can be measured objectively in units called utils.
- The theory assumes rationality of consumers and constant marginal utility of money.
- It also assumes diminishing marginal utility, where the utility of each successive unit of a commodity diminishes.
- The total utility of a basket of goods depends on the quantities of individual commodities.
- The ordinalist school believes utility cannot be measured in cardinal numbers, but consumers can rank or order the utility they derive from different goods.
- The main objective of the consumer is to maximize satisfaction given limited budget or income.
- Utility is measured in subjective units called utils.
- A given unit of money deserves the same value at any time or place it is to be spent.
- The marginal utility of a commodity diminishes as the consumer acquires larger quantities of it.
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