ASSIGNMENT - MANAGERIAL ECONOMICS

RIYA SINGH

19FLICDDNO1106

Q1) what is meant by utility? Is utility measurable? What is the controversy

about the measurability of utility? How does it figure in the analysis of
consumer demand?
- It is a measure of satisfaction an individual gets from the consumption of the
commodities. In other words, it is a measurement of usefulness that a consumer
obtains from any good. A utility is a measure of how much one enjoys a movie,
favourite food, or other goods. It varies with the amount of desire. The satisfaction of
a consumer is the basis of the utility function. It measures how much one enjoys when
he or she buys something. A utility is a measure of how much one enjoys a movie,
favourite food, or other goods. It varies with the amount of desire.

Measurement of a utility helps in analysing the demand behaviour of a customer.

Professor Marshall has said that “Utility can be measured and its measuring rod is
‘money. The price which we are ready to pay for an article is practically its price.
Nobody will be prepared to pay more than the utility which we derive from the
article. It is measured in two ways:

1) Cardinal Approach-In this approach, one believes that it is measurable. One

can express his or her satisfaction in cardinal numbers i.e., the quantitative
numbers such as 1, 2, 3, and so on. It tells the preference of a customer in
cardinal measurement. It is measured in utils.
2) Ordinal Approach-In this approach, one believes that it is comparable. One
can express his or her satisfaction in ranking. One can compare commodities
and give them certain ranks like first, second, tenth, etc. It shows the order of
preference. An ordinal approach is a qualitative approach to measuring a
utility.

All economists would agree that the consumer has gained utility by eating the
hamburger. Most economists would agree that human beings are, by nature,
utility-maximizing agents; human beings choose between one act or another
based on each act's expected utility. The controversial part comes in the
application and measurement of utility. Economists also say that human beings
rank their activities based on utility. A labourer chooses to go to work rather
than skip it because he anticipates his long-run utility to be greater as a result.
A consumer who chooses to eat an apple rather than an orange must value the
apple more highly, and thus anticipates more utility from it.
 It figures the analysis of consumer demand by Law of Diminishing Marginal
Utility which states that all else equal as consumption increases the marginal
utility derived from each additional unit declines. Marginal utility is derived as
the change in utility as an additional unit is consumed. Utility is an economic
term used to represent satisfaction or happiness. Marginal utility is the
incremental increase in utility that results from consumption of one additional
unit. Marginal utility may decrease into negative utility, as it may become
entirely unfavourable to consume another unit of any product. Therefore, the
first unit of consumption for any product is typically highest, with every unit
of consumption to follow holding less and less utility. Consumers handle the
law of diminishing marginal utility by consuming numerous quantities of
numerous goods.

Q2) what is Budget Line? What is the role in the determination of Consumer’s
equilibrium?
- A budget line is a straight line that slopes downwards and consists of all the possible
combinations of the two goods which a consumer can buy at a given market price by
allocating all his/her income. It is an entirely different concept from that of an
indifference curve, though they are both are essential for consumer equilibrium.

The two essential components of a budget line are:

 The purchasing power of a consumer, i.e. his/her income;

 The market price of both commodities.

The concept of the budget line is precisely explained through the following equation:

PX * QX + PY * QY = M
Equation of Budget Line Where,

 Px is the price of goods X;

 Qx is the quantity of goods X;
 Py is the price of goods Y;
 Qy is the quantity of goods Y;
 M is the income of the consumer.

Properties of Budget Line

It has specific characteristics which distinguish it from other economic tools.

Some of these features are discussed below: Properties of Budget Line

 Negative Slope: It slopes downward showing an inverse relationship between the
buying of the two goods.
 Straight Line: It is a straight line which denotes the constant market rate of exchange
at each combination.
 Real Income Line: It functions on the principle of income and the spending capacity
of a consumer.
 Tangent to Indifference Curve: The indifference curve touches the budget line at a
point, and this point is known as the consumer’s equilibrium.

Assumptions of a Budget Line

As we know that economics is mostly based on assumptions, so goes for the budget line

 Two Commodities: It is believed that the consumer will spend all his/her income
on purchasing only two goods.
 Income of the Consumer is Known: The consumer’s income is limited and is
known, even the revenue is wholly allocated for buying only two commodities.
 Market Price is Known: The market price of both the goods are known to the
consumer.
 Expenditure is equal to the Income: We assume that the consumer spends all
his/her income.

Slope of Budget Line

The slope of a budget line can be determined with the help of Market Rate of
Exchange.

Why does a budget line slope downward?

As we know that the consumer has a fixed income, he/she has to let go of some
quantity of Goods Y to get an additional unit of Goods X, This inverse relationship
between both commodities leads to a declining slope.

Determination of consumer’s equilibrium: - “

Consumer Equilibrium is a situation at which a consumer gets max satisfaction with

the given income & at the given price.” “Equilibrium is a situation at which there is
no tendency to change.” Assumption of consumer’s equilibrium

1) Consumer is rational: - The objective of consumer should be to get max satisfaction

with the limited income.

2) Cardinal measurement of utility: - utility of the commodity have to be expressed in

terms of cardinal no such as 1,2,3,4 etc.
 3) Consumer’s money income is constant & it does not change during consumption
process

4) Law of diminishing M.U. is applicable

5)Consumer taste, fashion & choice should not change