Question

In: Economics

explain in detail Utility Theory and its role in consumer choice and public decision making.

explain in detail Utility Theory and its role in consumer choice and public decision making.

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Expert Solution

Utility Theory

This is indeed an ecnomic concept which finds impossible to measure the actual utility that is offered from a good or a service and it makes it possible to rank all the available alternatives according to the will of the customer. Since, the choice depends a lot onthe income of the consumer and price, we have to observe that a rational consumer will not get to spend additional units of a service or a good until the marginal utility equal to or greater than that of a unit of service orthe good. This indicates that the actual price of the good is dependent on marginal utility and with that, the consumer ranks his preferences accordingly. In this way marginal utility justifies consumer choice. Utility theory also gets to provide the satisfaction measure of decision maker where it actually assumes that the decisions are made on utility maximisation principle which tells us that thethe best choice is the one that provides the highest utility to the decision maker and in this way, it is related to public decision making.


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