Assumptions or Cardinal Utility Analysis

Assumptions or Cardinal Utility Analysis: The main assumption or premises on which the cardinal utility analyses are made as under:

(i) Rationality. The consumer is retinal. He seeks to maximize satisfaction from the limited income which is at his disposal.

(ii) Utility is cardinally measurable. The utility can be measured in cardinal numbers such as 1, 3, 10, 15, etc. the utility is expressed in imaginary cardinal numbers tells us a great deal about the preference of the consumer for a good.

(iii) Marginal utility of money remain constant. Another important premise of cardinal utility of money spent on the purchase of good or service should remain constant.

(iv) Diminishing marginal utility. It is also assumed that the marginal utility obtained from the consumption of a good diminishes continuously as its consumption is increased.

(v) Introspection. It also assumes that, from one’s own experience, it is possible to draw inference about other person.

Criticism:

Pareto, an Italian Economist, severely criticized the concept of cardinal utility. He stated that utility is neither quantifiable nor addible. It can, however be compared. He suggested that the concept of utility should be replaced by the scale of preference. Hicks and Allen, following the footsteps of pare to, introduced the technique of indifference curves. The cardinal utility approach is thus replaced by ordinal utility function.