Title:Microeconomics-Asynchronous-6

Name: Swaroop Patra

Roll no: 2123249

1. Which one between cardinal and ordinal theories of utility seems to be more realistic
to you? Why?
2. Explain the law of diminishing marginal utility with an example

Answers:

1. Cardinal utility approach is more realistic to me. This is because it is based on

satisfaction level of the consumer, unlike ordinal approach which is based only on the
preferences. The Cardinal approach is more favourable because it takes the consumed
satisfaction of the commodity.

2. The law of diminishing marginal utility states that as we consume more and more
units of a commodity, the utility derived from each successive unit goes on
decreasing. It means to say that after every unitary increase in consumption the
satisfaction derived from the same keeps on decreasing. For example, as we buy 1 ice
cream the total satisfaction derived from it is of 20 units which means our marginal
utility is 20 units. Next, we buy 2 ice creams the total satisfaction is 36 units and the
marginal utility is 16 units. Next, we buy 3 ice creams the satisfaction derived is of 40
units and the marginal utility is only 4 units. Finally we buy 4 ice creams the
satisfaction is also 40 units this means the marginal utility is 0. This exactly is what
the law of diminishing marginal utility states, as the units of ice cream consumed
increased the marginal utility derived kept decreasing to the point where it reached 0.