Cardinal Utility Approach

Cardinal Utility Approach

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Very Short Questions

  • Define utility.

Ans) Utility is defined as the wants satisfying capacity of a commodity .In other words,it is the satisfaction obtained from the consumption of commodity.

  • What do you mean by cardinal utility approach?

Ans) Cardinal Utility approach is the method of analyzing utility which believes that utility is a quantitative concept i.e, utility can be measured numerically .Its unit of measurement is Utils.

  • List any four assumptions of cardinal utility analysis.

Ans) The  four assumptions of cardinal utility analysis are as follows:

  1. The consumer is rational.
  2. Utility can be measured in cardinal number.
  3. Marginal utility of money remains constant.
  4. Units of consumption are suitable.

 

  • Define the total utility.

Ans) Total utility is the total satisfaction obtained from the consumption of a given units of a commodity .It is obtained by the summation of marginal utility.

  • Define the marginal utility.

Ans) Marginal utility is the addition made to the total utility from one additional unit of consumption.

  • Define the concept of ordinal utility approach.

Ans) Ordinal utility approach is the method of analyzing utility as a subjective phenomenon. According to this approach,utility cannot be expressed quantitatively. However,ranking is possible.

  • Define indifference curve.

Ans) Indifference curve is defined as the locus of all combinations of two goods which yields the same level of satisfaction to the consumer.It is also called equal satisfaction curve. It is downward slopping and convex to the origin.

  • Write any four assumptions of indifference curve analysis.

Ans) The four assumptions of indifference curve analysis are as follows:

  1. Rational consumer.
  2. Ordinal measurement of utility.
  3. Diminishing marginal rate of substitution.
  4. Transitivity and consistency.

 

  • Make a list of properties of indifference curve(IC).

Ans) The list of properties of indifference curve are as follows:

  1. An IC slopes downward from left to right.
  2. An IC is convex to the origin.
  3. ICs never intersect each other.
  4. Higher the indifference curve,higher will be level of satisfaction.

 

  • Define the meaning of marginal rate of substitution (MRS).

Ans) Marginal rate of substitution is the rate at which one commodity is substituted for another so that total satisfaction remains the same. It is the slope of indifference curve.

  • Why does marginal rate of substitution diminish?

Ans) The marginal rate of substitution diminish because of the following reasons:

  1. Goods are not perfect substitute for each other.
  2. The particular want is satiable.
  3. Increase in the quantity of one good does not increase the want satisfying power of the other.
  • Why indifference curve is convex to origin?

Ans) Indifference curve is convex to origin because of diminishing marginal rate of substitution between two goods. The rate of substitution goes on diminishing as we move downward to the right.

  • Higher the indifference curve yields higher level of satisfaction .Why?

Ans) Higher the indifference curve contains more units of at least one good. More is preferred to less. Therefore,higher indifference curve yields higher level of satisfaction.

  • What do you mean by consumer’s equilibrium?

Ans) Consumer’s equilibrium means the situation in which the consumer derives maximum satisfaction or utility from his given money income and market price of the goods.

  • What is price (budget) line?

Ans) Price line is the locus of all combinations of two goods which can be purchased with the given money income of the consumer.

  • Why does a budget or price line shift?

Ans) The budget or price line shift when there is change in money income of the consumer or change in price of goods.

  • Write down the conditions required for the consumer’s equilibrium according to the ordinal utility approach.

Ans) The conditions required for the consumer’s equilibrium according to the ordinal utility approach are as follows:

  1. Price line must be tangent to the indifference curve.
  2. Indifference curve should be convex to the origin.

 

  • When does the consumer’s equilibrium change?

Ans) There will be change in consumer’s equilibrium when there is change in income of the consumer or change in price of good.

  • Define price effect.

Ans) Price effect is defined as the change in consumer’s equilibrium with the change in price of a commodity .Purchase of goods will be affected with the change in price of a commodity,Keeping other things constant.

  • What is price consumption curve (PPC)?

Ans) Price consumption curve is the locus of different equilibrium points obtained due to change in price of a commodity. In other words, PPC is the curve that joins different equilibrium points of price effect.

  • Define income effect.

Ans) Income effect is defined as the change in equilibrium due to change in income of the consumer. It shows the effect of change in income to the quantity demanded. It is positive in case of normal goods ,negative in case of inferior goods and zero in case of neutral goods.

  • What do you mean by income consumption curve?

Ans) Income Consumption Curve (ICC) is defined as the locus of different consumer’s equilibrium points obtained at different income of the consumer. In other words, ICC is the curve that joins different equilibrium points of income effect.

  • Define substitution effect.

Ans) Substitution effect is defined as the effect of price change on quantity demanded when income is compensated such that consumer’s utility is unchanged. It is part of price effect.

Price effect= Substitution effect + Income effect

  • What do you mean by Engel curve?

Ans) An Engel curve is a curve which shows optimum quantity of a commodity purchased at different levels of income .In other words Engel’s curve indicates how much quantity of a commodity a consumer will consume at different levels of his income in order to be in equilibrium.

 

 

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