Cardinal Utility Analysis: Total Utility, Marginal Utility and Relation Between TU & MU

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Cardinal Utility Analysis | Total Utility & Marginal Utility - Relation between TU & MU (Economics)

Cardinal Utility Analysis

  • Given by Alfred Marshall

  • Utility – want satisfying power of a good or service

  • Satisfaction measured in utils

  • Measurement of utility in numbers is possible

  • Utilities can be compared

  • Subjective concept

Total Utility and Marginal Utility

Total Utility

  • Sum of utilities derived from total consumption

  • More the consumption, more the total utility

  • Denoted by TU

Marginal Utility

  • Increase in satisfaction from the consumption of an additional unit of a good or a service.

  • With increase in consumption, marginal utility falls after a certain point when TU becomes maximum.

  • Maximum point of TU – saturation point

  • Denoted by MU

Relationship between TU and MU

Relationship Between TU And MU

Relationship between TU and MU

Law of Diminishing Marginal Utility

Assumptions

  • Tastes and preferences constant

  • Income constant

  • Independent utility

  • No long gaps between consumption

  • Continuous consumption

  • Marginal utility of money constant

  • Units of consumption identical

  • Utility measurable in numbers (utils)

  • No substitutes

Diagrammatical Representation

Diagrammatical Representation

Diagrammatical Representation

Law of Equi-Marginal Utility

  • Consumer distributes income between goods such that utility derived from last rupee spent on each good is same

  • Equilibrium established when MU of money spent on each goods is the same

  • MUZ/PZ = MUY/Py = MUm

Law of equi-marginal utility

Law of Equi-Marginal Utility

Equi Marginal Utility

Equi Marginal Utility

Equi Marginal Utility

  • At 3 units of consumption of apples and 4 units of consumption of oranges, MU of oranges and MU of apples is equal and their combined cumulative TU is the highest.

MCQs

Q.1. According to the law of diminishing marginal utility:

a) Utility is at a maximum with the first unit

b) Increasing units of consumption increase the marginal utility

c) Marginal product will fall as more units are consumed

d) Total utility will rise at a falling rate as more units are consumed

Answer: C

Q.2. At saturation point MU of a commodity is

(a) Positive

(b) Zero

(c) Negative

(d) Increasing

Answer: B

Q.3. Marshallian cardinal utility analysis assumes

(a) Marginal utility of money is zero

(b) Marginal utility of money is decreasing

(c) Marginal utility of money is increasing

(d) Marginal utility of money is constant

Answer: B

Q.4. The marginal utility is always diminishing because :

a) The level of satisfaction changes

b) Price rises

c) Income changes

d) Marginal utility of money changes

Answer: A

Q.5. The law of equi-marginal utility states that :

a) The consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee spend on each good is equal

b) The consumer will distribute his money income between the goods in such a way that the utility derived from spending his entire income on each good will be equal to 1.

c) The utility derived from consumption of all goods will be maximum if their marginal utility is increasing.

d) The sum of utilities of all commodities is equal to marginal utility of all commodities.

Answer: A

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