Utility and Cardinal Utility Theory

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Questions and Answers

According to Cardinal Utility theory, what is the unit of measurement for satisfaction?

Joules

Grams

Meters

Utils (correct)

Which of the following is NOT an assumption of Cardinal Utility Theory?

Utility can be measured using cardinal numbers.

Consumers are rational and aim to maximize satisfaction.

The marginal utility of money decreases with more income. (correct)

The marginal utility of a good diminishes as consumption increases.

What does 'total utility' refer to?

The total satisfaction from consuming a specific quantity of a good. (correct)

The inverse of marginal utility.

The additional satisfaction from consuming one more unit of a good.

The rate at which utility grows.

What is the mathematical formula for marginal utility (MU)?

MU = ΔTU / ΔQ (D) Signup and view all the answers

In the given example with oranges, if Beka's total utility increases from 10 utils to 12 utils when consuming the 3rd orange, what is the marginal utility of the 3rd orange?

2 utils (C) Signup and view all the answers

According to the provided information, what happens to marginal utility when total utility reaches its maximum?

It becomes zero. (B) Signup and view all the answers

What is indicated by a negative marginal utility?

A decrease in total utility. (A) Signup and view all the answers

What does 'diminishing marginal utility' mean?

Each additional unit of a good provides a smaller increase in satisfaction than the last. (A) Signup and view all the answers

Based on the information provided, if the total utility from consuming 6 bananas is 37 utils and the total utility from consuming 7 bananas is also 37 utils, what is the marginal utility of the 7th banana?

0 utils (C) Signup and view all the answers

In the context of Cardinal Utility Theory, what does it mean when the consumer is considered 'rational'?

The consumer aims to maximize satisfaction with their limited income. (B) Signup and view all the answers

Which statement best describes the concept of utility?

The subjective satisfaction or pleasure derived from consuming a good or service. (A) Signup and view all the answers

The fact that a jacket provides high utility in winter but low utility in summer illustrates which aspect of utility?

The relativity of utility across time, place and persons. (C) Signup and view all the answers

Which of the following statements is TRUE with regards to the relationship between 'utility' and 'usefulness'?

Usefulness is concerned with a product's inherent capabilities, while utility is related to consumer satisfaction. (A) Signup and view all the answers

What is a key assumption of Cardinal Utility Theory?

The utility of a good or service can be measured using utils. (A) Signup and view all the answers

Given that 'utils' attempt to quantify satisfaction, how do economists use this concept in cardinal utility?

To measure the absolute pleasure or satisfaction a consumer derives from consumption. (B) Signup and view all the answers

What is the key difference between the terms 'utility' and 'usefulness'?

'Usefulness' is about the intrinsic properties of a good, while 'utility' considers the consumer's subjective experience. (D) Signup and view all the answers

Why does the utility derived from the same product vary between different individuals?

Each individual has unique preferences, needs, and tastes, influencing the satisfaction they derive from the same product. (C) Signup and view all the answers

What is the primary reason for the difficulty of measuring utility quantitatively?

Utility is subjective and qualitative, making it challenging to establish a universal scale or standard for measurement. (A) Signup and view all the answers

What aspect of utility is illustrated by the example of a jacket providing higher utility in winter than in summer?

The relativity of utility to the context of consumption. (A) Signup and view all the answers

Which of the following best describes the concept of 'cardinal utility'?

A framework for understanding consumer behavior that assumes utility can be numerically measured. (C) Signup and view all the answers

What is the significance of the saturation point in relation to total utility?

It represents the point beyond which total utility will decrease. (A) Signup and view all the answers

How does the cardinal utility theory measure utility?

In monetary units or subjective units called 'utils'. (A) Signup and view all the answers

Which of the following reflects the assumption of constant marginal utility of money?

The utility derived from each unit of money remains the same. (A) Signup and view all the answers

What does diminishing marginal utility imply about consumer behavior?

As consumption increases, the additional satisfaction from new units decreases. (B) Signup and view all the answers

If a consumer's total utility from consuming four quantities of a commodity is 24 utils and the marginal utility from consuming the fifth quantity is zero, what can be inferred?

The consumer has reached maximum total utility for the commodity. (B) Signup and view all the answers

Which aspect of Cardinal Utility Theory reflects the consumer's goal?

To achieve satisfaction through rational decisions with limited income. (C) Signup and view all the answers

In the context of a consumer's satisfaction, how is total utility represented mathematically?

$TU = f(X1, X2;...;Xn)$ (B) Signup and view all the answers

Which statement best describes the relationship between total utility and marginal utility?

Marginal utility decreases as total utility increases until it reaches zero. (B) Signup and view all the answers

What happens to total utility when a consumer exceeds the saturation point of a commodity?

Total utility starts to decline. (A) Signup and view all the answers

Which of the following is a characteristic of the cardinal utility approach regarding measurement?

Utility can be expressed in absolute numerical terms such as 'utils'. (A) Signup and view all the answers

Study Notes

Utility

Utility is the satisfaction derived from consuming goods or services, representing a commodity's ability to fulfill wants.
Utility is subjective and varies among individuals based on needs and preferences.
Utility changes with time, place, and quantity consumed.
Utility differs from usefulness, focusing on the consumer's perception rather than the product's function.

Cardinal Utility Theory

Utility is measurable using "utils," a hypothetical unit.
Consumers aim to maximize satisfaction within their budget.
Utility can be measured in monetary terms based on a consumer's willingness to pay.
Marginal utility of money is assumed constant.
Diminishing marginal utility applies: Each additional unit consumed provides less satisfaction.
Total utility depends on quantities of all goods, not just one.

Measuring Utility

Total Utility (TU): The total satisfaction from consuming a specific quantity of a good at a specific time. It initially increases, then plateaus, and eventually decreases.
Marginal Utility (MU): The additional satisfaction from consuming one more unit. It decreases as consumption increases. Calculated as the change in total utility divided by the change in quantity.

Law of Diminishing Marginal Utility (LDMU)

As consumption increases, the satisfaction from each additional unit decreases. This assumes other goods remain constant.
The law describes a typical pattern, demonstrating declining utility with increased consumption.

Consumer Equilibrium

Consumer equilibrium occurs when the marginal utility per birr (or other currency) spent on each good is equal.
Consumer income/budget determines purchasing power.
Rational consumers maximize utility with a limited budget.
Consumer equilibrium (single commodity): Marginal utility of X equals the market price of X (MUx = Px).
If MUx > Px, buy more X for increased utility.
If MUx < Px, buy less X for increased utility.

New Information

Utility is relative and not absolute. Different individuals derive varying utilities from the same good. Goods can also hold different utilities at different times and locations.
"Utility" and "usefulness" aren't interchangeable. Usefulness relates to a product, whereas utility relates to a consumer's perception.
Cardinal utility theory assumes utility can be measured numerically (e.g., in utils) or by a consumer's willingness to pay in monetary units.
The primary goal of a rational consumer is satisfaction maximization within their budget constraints.
Constant marginal utility of money is a cardinal utility assumption indicating each additional currency unit holds the same worth in utility.
The total utility of many goods is calculated by the amounts of each good consumed (TU = f (X1, X2...Xn)).
Consumption beyond a saturation point leads to negative marginal utility, decreasing overall satisfaction.

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Description

Explore the concepts of utility, its relativity, and the cardinal utility theory. Understand how utility varies based on individual preferences, time, and context. This quiz will assess your knowledge of key principles in economic utility.