CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

Cardinal Approach
According to this school of thought, utility is a quantitative approach and it can be
calculated in terms of cardinal numbers like 1, 2, 3, . . . ., N.
Utility maximization can be achieved by satisfying law of equi-marginal utility.
However, law of equi-marginal utility cannot be satisfied unless law of diminishing marginal
utility satisfies.
Tools of Utility Maximization:
1. Law of Diminishing Marginal Utility
2. Law of Equi-Marginal Utility
Law of Diminishing Marginal Utility
Definition: If other things do not change and a consumer increases the use of a commodity, then
utility of every new unit of the commodity will be less than the utility of the previous unit. From
other things being equal or do not change we mean that the quality of the commodity and taste of
the consumer do not change.
Explanation: This law shows that as we go on increasing the units of one good say units of good
X, then marginal utility at each unit consumed will decrease in such a way that initially it will
remain greater than zero, then it will become zero, and finally it will become negative
respectively.
Points to Remember:
1. The situation where marginal utility remains greater than zero, in this situation, total
utility derived from the consumption of good X will always increase.
2. The situation where marginal utility becomes equal to zero, in this situation, total utility
derived from the consumption of good X will become maximum.
3. The situation where marginal utility turns to negative or becomes less than zero, in this
situation, total utility derived from the consumption of good X will always decrease.
Assumptions:
This law will be satisfied if the following conditions will be satisfied:
1. Consumer uses only one good for his consumption.
2. Quality of the good does not change.
3. Standard units must be consumed.
4. Continuous consumption should be made.
5. Taste and attitude of the consumer must remain same.
6. Income of the consumer should remain unchanged.

Schedule:
Units of Good X Consumed Total Utility of Good X Marginal Utility of Good X
0 0 -
1 15 15
2 27 12
3 36 9
4 42 6
5 45 3
6 45 0
7 42 -3

Resource Person: Muhammad Shahid Hassan Page 1

 CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

Law of Equi-Marginal Utility

A very important fact of human life is the scarcity of resources and insufficient incomes.
We cannot find a single person who feels that his income is enough to satisfy all of his wants.
Thus, it is natural that people want to avoid wastage and try to spend their incomes in such a
way that they get maximum total utility.
For this purpose they have to compare the utilities of various commodities and use them
according to the principle of Equi-Marginal. This principle" or law can be defined as:
Definition: It is a law whereby a consumer will spent his money income in such a way that the
marginal utility divided by price of first good at the last unit consumed should be equal to the
marginal utility divided by price of the second good at the last unit consumed. At this point,
consumer will always enjoy maximum total utility. Moreover, at this point, combination of units
of two goods will be called as optimum commodity combination.
For example: At last units consumed of each good this condition should be satisfied
MUX MUY

PX PY

Resource Person: Muhammad Shahid Hassan Page 2

 CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

Assumptions:
1. This law will only hold if law of diminishing marginal utility holds.
2. This law will follow all the assumptions of law of diminishing marginal utility apart from
the assumption of one good model.
3. Consumer derives his utility from the consumption of two goods.
4. Consumer knows about the prices of two goods and about his money income.

Let

Consumer’s Income = I = $13.5, PX = $3 / Unit, and PY = $2.5 / Unit

Schedule:
Units of TU of MU of Units of TU of MU of
MUX / PX MUY / PY
Good X Consumed Good X Good X Good Y Consumed Good Y Good Y
0 0 - 0 0 - - -
1 15 15 1 20 20 5 8
2 27 12 2 35 15 4 6
3 36 9 3 45 10 3 4
4 42 6 4 50 5 2 2
5 45 3 5 50 0 1 0
6 45 0 6 45 -5 0 -2
7 42 -3 7 35 -10 -1 -4

Now
Money Spent Good Purchased or Consumed Utility Derived
$2.50 Y 8
$2.50 Y 6
$3 X 5
$2.50 Y 4
$3 X 4
Total Money Optimum Commodity Total Utility
Spent = $13.50 Combination = {2X, 3Y} Derived = 27.00

From the above table we could see that consumer if consumer would buy two units of X and
three units of good Y, then he or she would enjoy maximum utility equal to 27. Therefore, in the
above scenario the optimum commodity combination has found to be {2X, 3Y} at which
MUX MUY 12 10
 =>  => 44
PX PY 3 2.5
Consumer Equilibrium:
According to Cardinal school of thought consumer equilibrium will be achieved at a
point where the utility maximizing rule satisfied and it is exactly as it is as it is in case of Law of
Equi-Marginal Utility.
M UX M UY
(At Last Unit Consumed)  (At Last Unit Consumed)
PX PY

Resource Person: Muhammad Shahid Hassan Page 3

 CARDINAL VIEW ABOUT UTILITY MAXIMIZATION

CLASS ACTIVITY

Name:__________________________ I.D#_____________________

Date: __________________________ Section:____________________

______________________
Signature of the student

Mr. Usama Bin Masood Querashi has received Rs. 1350 as his pocket money from his father for
the month of May, 2015 to consume on two goods such as Zest Burger and French Fries. The
price for Zest Burger is Rs. 300 per burger and the price for Fries is Rs. 75 per packet. The
marginal utilities derived from the consumption of both goods are given as under:

Units of TU of Zest MU of Zest

Money Burger Burger TU of Fries MU of Fries
0 0 - 0 -
1 3000 625
2 5700 550
3 2400 1625
4 10290 375
5 1710 2225
Rs. 1350

Being a student of Fundamentals of Economics, help Mr. Usama Bin Masood Querashi that

1. How could he complete the table of total and marginal utilities of both
commodities?
2. How could he interpret the relationship between total utility and marginal utility
of both goods?
3. How could he find a combination of both commodities that satisfy Mr. Usama Bin
Masood Querashi the most?
4. What is the maximum utility that he is going to face at the optimum commodity
combination?

Resource Person: Muhammad Shahid Hassan Page 4