1.4. Introduction to the Ordinal Utility Theory

Question 1

In the _ approach, utility cannot be measured absolutely.

Answer 1

ordinal utility

Question 2

In the ordinal utility approach, utility cannot be measured absolutely, but different consumption bundles are ranked according to _.

Answer 2

preferences

Question 3

_ concept is based on the fact that it may not be possible for consumers to express the utility of various commodities they consume in absolute terms, like, 1 util, 2 util, or 3 util, but it is always possible for consumers to express the utility in relative terms.

Answer 3

Ordinal utility

Question 4

It is _ possible for the consumers to rank commodities in the order of their preference, as 1st, 2nd, 3rd, and so on.

Answer 4

practically

Question 5

That is, in ordinal utility approach, to make his/her choice, the consumer needs not know the ___, but be able to rank the various baskets of goods according to the ___.

Answer 5

utility of various commodities in a specific unit, satisfaction that each bundle gives

Question 6

Assumptions of Ordinal Utility

Answer 6

• Rationality
• Utility is ordinal
• Diminishing marginal rate of substitution (DMRS)
• The total utility of the consumer depends on the quantity of the commodity consumed
• Consistency and transitivity of choices

Question 7

_: The consumer is assumed to be rational.

Answer 7

Rationality

Question 8

The main objective of rational consumer is to maximize his/her satisfaction or utility given his/her _ and _.

Answer 8

income and market prices

Question 9

_: utility is not absolutely (cardinally) measurable.

Answer 9

Utility is ordinal

Question 10

Utility is ordinal: utility is not _ (_) measurable.

Answer 10

absolutely, cardinally

Question 11

The consumer can rank his/her preference (order the various baskets of goods) according to the _ of each basket.

Answer 11

satisfaction

Question 12

_ is the rate at which a consumer is willing to substitute one commodity for another commodity so that his/her total satisfaction remains the same.

Answer 12

The marginal rate of substitution

Question 13

The rate at which one good can be substituted for another in a consumer‘s basket of goods _ as the consumer consumes more and more of the good.

Answer 13

diminishes

Question 14

_ means that as the consumer substitutes more and more of one commodity (say Y) for another commodity (say X), he/she will be prepared to give up fewer units of the latter (X) for each additional unit of the former (Y).

Answer 14

Diminishing marginal rate of substitution (DMRS)

Question 15

Diminishing marginal rate of substitution (DMRS) means that as the consumer substitutes more and more of one commodity (say Y) for another commodity (say X), he/she will be prepared to give up _ units of the latter (X) for each additional unit of the former (Y).

Answer 15

fewer

Question 16

_: In ordinal utility, the total utility of a consumer is measured by the amount (quantities) of all items he/she consumes from his/her consumption basket.

Answer 16

The total utility of the consumer depends on the quantity of the commodity consumed

Question 17

: is assumed that the consumer is consistent in his/her choice, that is, if he/she chooses bundle A over B in one period, he/she will not use B over A in another period if both bundles are available to him/her, under exactly the same conditions.

Answer 17

Consistency and transitivity of choices

Question 18

The consistency assumption may be symbolically written as follows:
═> If bundle A>B, then B is _ than A

Answer 18

not greater

Question 19

In ordinal utility, it is assumed that consumers’ choices are characterized by transitivity: if
bundle A is preferred to B and B is preferred to C, then bundle _ is preferred to _.

Answer 19

A to C

Question 20

Symbolically, we may write the transitivity assumption as follows:
═> If bundle A >B and B>C, then A_C.

Answer 20

> , greater than