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    Assumptions of Law of Diminishing Marginal Utility

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    Cheryl Louis
    The law of diminishing marginal utility operates under several key assumptions: 1) That consumers act rationally to maximize their utility subject to their income. 2) That the marginal utility of money remains constant as consumption increases. 3) That the marginal utility gained from additional units of a good diminishes with more consumption. 4) That utility is additive across different goods and the total utility is the sum of the utility of individual goods.

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    Assumptions of Law of Diminishing Marginal Utility

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    Cheryl Louis
    3K views3 pages
    The law of diminishing marginal utility operates under several key assumptions: 1) That consumers act rationally to maximize their utility subject to their income. 2) That the marginal utility of money remains constant as consumption increases. 3) That the marginal utility gained from additional units of a good diminishes with more consumption. 4) That utility is additive across different goods and the total utility is the sum of the utility of individual goods.

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    The law of diminishing marginal utility operates under several key assumptions: 1) That consumers act rationally to maximize their utility subject to their income. 2) That the marginal utility of money remains constant as consumption increases. 3) That the marginal utility gained from additional units of a good diminishes with more consumption. 4) That utility is additive across different goods and the total utility is the sum of the utility of individual goods.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    3K views3 pages

    Assumptions of Law of Diminishing Marginal Utility

    Uploaded by

    Cheryl Louis
    The law of diminishing marginal utility operates under several key assumptions: 1) That consumers act rationally to maximize their utility subject to their income. 2) That the marginal utility of money remains constant as consumption increases. 3) That the marginal utility gained from additional units of a good diminishes with more consumption. 4) That utility is additive across different goods and the total utility is the sum of the utility of individual goods.

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    Assumptions of Law of Diminishing Marginal Utility:

    The law of diminishing marginal utility is true under certain assumptions. These assumptions are as under: 1. Rationality: In the cardinal utility analysis, it is assumed that the consumer is rational. It aims at maximization of utility subject to availability of his income. 2. Constant marginal utility of money: It is assumed in the theory that the marginal utility of money based for purchasing goods remains constant. If the marginal utility of money changes with the increase or decrease in income, it then cannot yield correct measurement of the marginal utility of the good. 3. Diminishing marginal utility: Another important assumption of utility analysis is that the utility gained from the successive units of a commodity diminishes in a given time period. 4. Utility is additive: In the early versions of the theory of consumer behavior, it was assumed that the utilities of different commodities are independent. The total utility of each commodity is additive. U = U1 (X1) + U2 (X2) + U3 (X3). Un (Xn) 5. Consumption to be continuous: It is assumed in this law that the consumption of a commodity should be continuous. If there is interval between the consumption of the same units of the commodity, the law may not hold good. For instance, if you take one glass of water in the morning and the 2nd at noon, the marginal utility of the 2nd glass of water may increase. 6. Suitable quantity: It is also assumed that the commodity consumed is taken in suitable and reasonable units. If the units are too small, then the marginal utility instead of falling may increase up to a few units. 7. Character of the consumer does not change: The law holds true if there is no change in the character of the consumer. For

    example, if a consumer develops a taste for wine, the additional units of wine may increase the marginal utility to a drunkard. 8. No change to fashion: Customs and tastes: If there is a sudden change in fashion or customs or taste of a consumer, it can than make the law inoperative. 9. No change in the price of the commodity: there should be any change in the price of that commodity as more units are consumed. 10. NATURE OF THE COMMODITY :- There should be no change in the nature of the commodity. For example, If first mango taken is not better, while the second is better, then the utility will not decrease and the utility of second will be greater than first. 11. REASONABLE UNITS :- It is assumed that the units of a commodity which are used should be suitable and reasonable if the units are too small then this law will not operate. 12. NO CHANGE IN INCOME :- It is also assumed that the income of the consumer should not change, otherwise the law may not operate. 13. NO CHANGE IN FASHION AND CUSTOMS :- If there is a sudden change in fashion or customs of a consumer, the law may not operate. 14. RARE COLLECTIONS :- If there are two diamonds in the world the possession of the second diamond will push up the marginal utility 15. NO CHANGE IN THE STOCK OF OTHER PEOPLE :Sometimes an increase in the stock of a commodity increases the marginal utility. For example the number of telephone increase in the city, but the utility of our telephone increases. 16. STATE OF MIND SHOULD NOT CHANGE :- If a consumer has been told that mango is a tonic for his health,

    then marginal utility will increase instead of falling. 17. There is no time gap between the consumption of different units. 18. Every consumer wants to maximize utilty.

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