ASSUMPTIONS OF MARGINAL UTILITY ANALYSIS

Assumptions of Marginal Utility Analysis

(1) Rationality: A consumer is rational and attempts to attain maximum satisfaction from his limited money income.

(2) Cardinal Measurability of Utility: According to neoclassical economists, utility is a cardinal concept i.e., utility is a measurable and quantifiable entity. It implies that utility can be measured in cardinal numbers and assigned a cardinal number like 1, 2, 3 etc. Marshall and some other economists used a psychological unit of measurement of utility called utils. Thus, a person can say that he derives utility equal to 10 utils from the consumption of 1 unit of commodity A and 5 from the consumption of 1 unit of commodity B. Since a consumer can quantitatively express his utility, he can easily compare diuerent commodities and express which commodity gives him greater utility and by how much. Utilities from diuerent units of the commodity can be added as well.

According to this theory, money is the measuring rod of utility. The amount of money which a person is prepared to pay for a unit of a good, rather than go without it, is a measure of the utility which he derives from the good.

(3) Constancy of the Marginal Utility of Money: The marginal utility of money remains constant throughout when the individual is spending money on a good. This assumption, although not realistic, has been made in order to facilitate the measurement of utility of commodities in terms of money. If the marginal utility of money changes as income changes, the measuring-rod of utility becomes unstable and therefore would be inappropriate for measurement.

(4) The Hypothesis of Independent Utility: The total utility which a person gets from the whole collection of goods purchased by him is simply the sum total of the separate utilities of the goods. The theory ignores complementarity between goods.

Dhananjay sir, [23.02.18 21:26]

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