assuming tbat the law of diminishing marginal utility does not hold, how differently would consumers behave.

Expert Solution

law of diminishing marginal utility states that as a consumer consumes more of a given commodity , the additional utility that is derived from an extra unit of that good consumed goes on diminishing.

The assimptions which facilitates the law of diminishing marginal utility are as

1. All commodities have a standard unit to measure their utility derived from the consumption of the commodity.

2.Rationality.i.e. consumer always aim to maximize its utility.

3. homogeneity of the various goods consumed

4.marginal utility of money is constant given the wealth of the individual

However, there are cases where this law fails to hold true as follows:

1. Hobbies; an individual would follow an activity as he/she derives additional utitliy with every unit gained from that hobby for example collecting precious coins, stamps etc.

2. it doesnot apply on misers as they derive more and more from a commodity by consuming more.

3. marginal utility for money is never zero though it falls for the rich class.

4.if consumers are irrational, this law is not applicable.

5. it doesnot apply to gaining knowledge; its marginal utility always rises up.

Rahul Sunny answered 1 year ago

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