UGC NET COMMERCE November 2017(Paper-II) Q13
- Option : B
- Explanation : Assumptions: The theory of consumer behaviour based on the cardinal utility approach seeks to answer the above questions on the basis of the following assumptions.
(a) Rationality: It is assumed that the consumer is a rational being in the sense that he satisfies his wants in the order of their preference. That is, he or she buys that commodity first which yields the highest utility and the last which gives the least utility.
(b) Limited money income: The consumer has a limited money income to spend on the goods and services he chooses to consume. Limitedness of income, along with utility maximization objective makes the choice between goods inevitable.<br(c) Maximization of satisfaction: Every rational consumer intends to maximize his satisfaction from his/her given money income.
(d) Utility is cardinally measurable: The cardinalists have assumed that utility is cardinally measurable and that utility of one unit of a commodity equals the units of money which a consumer is prepared to pay for it and that 1 util = 1 unit of money.
(e) Diminishing marginal utility: Following the law of diminishing marginal utility, it is assumed that the utility gained from the successive units of a commodity consumed decreases as a person consumes them. This is an axiom of the theory of consumer behaviour.
(f) Constant marginal utility of money: The cardinal utility approach assumes that marginal utility of money remains constant whatever the level of a consumer’s income. This assumption is necessary to keep the scale of measuring rod of utility fixed. It is important to recall in this regard that cardinalists used ‘money’ as a measure of utility.
(g) Utility is additive: Cardinalists assumed not only that utility is cardinally measurable but also that utility derived from various goods and services consumed by a consumer can be added together to obtain the total utility. Suppose a consumer consumes X1, X2, X3, ... Xn units of a commodity X and that he derives U1, U2, U3, ...., Un, utils respectively, from the various units of commodity X consumed. Given the assumption, the total utility that the consumer derives form n units of commodity X can be expressed as
Un = U1(X1) + U2(X2) + U3(X3) + ... + Un(Xn).
