CARDINAL UTILITY ANALYSIS
Cardinal Utility Analysis
Given by Alfred Marshall
Utility – want satisfying power of a good or service
Satisfaction measured in utils
Measurement of utility in numbers is possible
Utilities can be compared
Subjective concept
Total Utility and Marginal Utility
Total Utility
Sum of utilities derived from total consumption
More the consumption, more the total utility
Denoted by TU
Marginal Utility
Increase in satisfaction from the consumption of an additional unit of a good or a service.
With increase in consumption, marginal utility falls after a certain point when TU becomes
maximum.
Maximum point of TU – saturation point
Denoted by MU
Relationship between TU and MU
Law of Diminishing Marginal Utility
Assumptions
Tastes and preferences constant
Income constant
Independent utility
No long gaps between consumption
Continuous consumption
Marginal utility of money constant
Units of consumption identical
Utility measurable in numbers (utils)
No substitutes
Diagrammatical Representation
Law of Equi-Marginal Utility
Consumer distributes income between goods such that utility derived from last rupee spent
on each good is same
Equilibrium established when MU of money spent on each goods is the same
MUZ/PZ
= MUY/Py
= MUm
Q.1. According to the law of diminishing marginal utility:
a) Utility is at a maximum with the first unit
b) Increasing units of consumption increase the marginal utility
c) Marginal product will fall as more units are consumed
d) Total utility will rise at a falling rate as more units are consumed
Answer: C
Q.2. At saturation point MU of a commodity is
(a) Positive
(b) Zero
(c) Negative
(d) Increasing
Answer: B
Q.3. Marshallian cardinal utility analysis assumes
(a) Marginal utility of money is zero
(b) Marginal utility of money is decreasing
(c) Marginal utility of money is increasing
(d) Marginal utility of money is constant
Answer: B
Q.4. The marginal utility is always diminishing because :
a) The level of satisfaction changes
b) Price rises
c) Income changes
d) Marginal utility of money changes
Answer: A
Q.5. The law of equi-marginal utility states that :
a) The consumer will distribute his money income between the goods in such a way that the
utility derived from the last rupee spend on each good is equal
b) The consumer will distribute his money income between the goods in such a way that the
utility derived from spending his entire income on each good will be equal to 1.
c) The utility derived from consumption of all goods will be maximum if their marginal utility is
increasing.
d) The sum of utilities of all commodities is equal to marginal utility of all commodities.
Answer: A
