Question

The loan of constant satisfaction for consumer is called

Answer 1

1. Rationality:

The consumer is assumed to be rational he aims at the maximization of his utility, given his income and market prices. It is assumed he has full knowledge (certainty) of all relevant information.

2. Utility is ordinal:

It is taken as axiomatically true that the consumer can rank his preferences (order the various ‘baskets of goods’) according to the satisfaction of each basket. He need not know precisely the amount of satisfaction. It suffices that he ex­presses his preference for the various bundles of commodities. It is not necessary to assume that utility is cardinally measurable. Only ordinal measurement is required.

Answer 2

It is taken as axiomatically true that the consumer can rank his preferences (order the various ‘baskets of goods’) according to the satisfaction of each basket. He need not know precisely the amount of satisfaction. It suffices that he ex­presses his preference for the various bundles of commodities. It is not necessary to assume that utility is cardinally measurable. Only ordinal measurement is required.

3. Diminishing marginal rate of substitution:

Preferences are ranked in terms of in­difference curves, which are assumed to be convex to the origin. This implies that the slope of the indifference curves increases. The slope of the indifference curve is called the marginal rate of substitution of the commodities. The indifference-curve theory is based, thus, on the axiom of diminishing marginal rate of substitution.