Question

1, Can we compare utility across individuals?

2, What is the law of diminishing marginal utility?

3, What is the consumer’s goal in terms of utility?

4, How will a consumer choose between two goods given their preferences, budget, and prices?

Answer 1

1. No utilities across individuals cannot be compared because utilities are ordinal and not cardinal means if one individual has greater utility than another person that individual would lie on a higher indifference curve but the magnitude of the difference cannot be derived. Hence, utilities cannot be compared.

2. Law of diminishing marginal utility states that as more and more of variable input is employed after a certain point, the marginal utility from an extra unit of variable input goes on diminishing.

3. The consumer aims to allocate goods in such a way that he/she reaches the highest indifference curve satisfying the budget constraint.

4. Consumer will maximize its utility by fulfilling the tangency condition; MRS = relative price of goods. In words, the point where indifference curve is tangent to the budget line.