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Utility Analysis
Utility Analysis
Utility Analysis
Dr. K. Anbumani
Associate Professor
Utility Analysis
Level of consumer satisfaction is measured in unit of ‘util’
Assumptions
1. Unit of commodity is standard.
2. Consumer’s taste and preference remains the
same
3. Units are consumed continuously at a time
4. Mental condition is stable.
Cardinal Utility
Utility is a psychological phenomena. It is a feeling of satisfaction,
happiness, etc.
Assumptions
1. Rational: Buy first which gives maximum utility
2. Limited income: makes choice making inevitable
3. Maximum satisfaction: from spending his/her
income
4. Utility is cardinally measurable
5. Diminishing marginal utility
6. Constant marginal utility of money
7. Utility is additive
Ordinal Utility
Modern economists JR Hicks, and RGD Allen believed that
utility can only be ordinally measured not in quantitative
terms.
Sir. John Richard Hicks
(1904-1989) British Economist
Nobel Prize in Economics (1972)
Sir. Roy George Douglas Allen
(1906-1983) British Economist
Known for: Elasticity of
They hold that utility can be expressed in terms
substitution of ‘less than’
or ‘more than’. Therefore it is possible only to make some
order for their preference or desirability, but not with exact
number values.
Ordinal Utility
Assumptions
1. Rational: Buy first which gives maximum utility
2. Utility can be expressed only ordinally
3. Consumer’s choice is transitive: If he prefers A to
B, B to C then A to C…..or….A=B, B= C, then A = C
4. Consumer’s choice is consistent: If he prefers A to
B in one time, he would not prefer B to A some
other time, nor B = A.
5. Saturation is not achieved: Consumer never gets
supply full for any required good or service.
6. MRTS is diminishing: The rate at which a
consumer is willing to substitute one commodity
(X) for another (Y).
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