Question

describe the basic of consumer choice and the assumptions of most consumers of their choices. explain the utilitarian approach to maximuzation of consumer satisfaction.

use your own word ( 200 words )

Answer 1

Every consumer consumes because she gets utility from it. The utility is the numerical score assigned to the satisfaction a good provides to the consumer. A consumer chooses because she has a limited budget to purchase the required commodity in various quantities. There are two utility approaches to consumer theory: 1. Cardinal approach and 2. Ordinal approach.

1. Cardinal approach- Marshall gave it final shape. The utility a consumer gets from the consumption is equal to the money she pays for it. Following are the assumptions:

1. Utility can be measured and its unit is utils.
2. Utilities are independent
3. Marginal utility of money remains constant throughout.

From these assumptions, two theories emerge:

1. Theory of diminishing marginal utility which states that with the consumption of each successive unit of good, the additional utility decreases.
2. Theory of equi-marginal utility which states that a consumer chooses different commodities in such a way that marginal utility of last dollar spent on each good is constant.

That is MU_X/P_X = MU_Y/P_Y and this is the condition for the maximization of consumer satisfaction.

Same condition is also followed from the ordinal approach which says that utilities can not be measured but ranked.