Question

What if I told you that cardinal utilities automatically meet all three assumptions for utilities under rational choice theory. Would I be right? Either explain why this is correct, or provide a counter example.

Answer 1

Time is time different theories have been advanced to explain demand of consumer for goods. Cardinal utility is oldest theory which provides explanation of consumer demand

Cardinal utility derives the law of demand which establishes (inverse) relation between price and quantity demanded of a product.

Yes u right Cardinal utility automatically meet assumptions of rational choice theory such as

1)rationality :it assumed that consumer are rational and satisfy their want according to preference this means that purchase first which gave highest utility, then the second, third highest utility and so on.

2)limited money :it assumed consumer has limited money to purchase good and service thus means that consumers purchase first good and service which is necessary.

3)maximize satisfaction :every consumer aims purchase goods and service which give maximum satisfaction on amount of good and service

4)marginal Utility of Money is Constant: It iassumed that the marginal utility of money remains constant irrespective of consumer’s income level.

5)diminishing Marginal Utility: means that increased consumption of a commodity, the utility derived from each consumption unit goes on diminishing. This law holds true for the theory of ration choice theory.

Rational choice theory is an that principle of economic that assumes Always make prudent individual and logical decisions that provide them with the highest amount of utility.