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Cardinal & Ordinal Measurement & Cardinal Approach

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1. Cardinal & ordinal measurement in shortcoming of Ic curve
2. optimum level of consumption in cardinal Approach.

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Solution This solution is FREE courtesy of BrainMass!

Q.01
<br>Differentiate between Cardinal and Ordinal measurement of utility. Explain also the shortcomings of Indifference curve analysis briefly?
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<br>cardinal measurement of utility: A measurement based on a scale or quantitative numbers, such as 1, 5, or 357.2, that enables a comparison in magnitude. Most economic measures are based on cardinal numbers, including gross domestic product, unemployment rate, the price of chocolate, and the quantity of wheat produced. The benefit of cardinal measurement is the ability to directly compare one measure with another. There is little or no evidence to suggest that such measurement is possible and is not even needed for modern consumer demand theory and indifference curve analysis.
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<br>ordinal measurement analyzes utility derived from the consumption of goods and services, based on a relative ranking of the goods and services consumed. With ordinal utility, goods are only ranked only in terms of more or less preferred, there is no attempt to determine how much more one good is preferred to another. Relative comparability means, for example, that first is more than second and second is more than third, but how much more is not known. The notion of ordinal measurement is most often seen in the economic analysis of indifference curves and utility.
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<br>Ordinal utility is the underlying assumption used in the analysis of indifference curves and should be compared with cardinal utility, which (hypothetically) measures utility using a quantitative scale.
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<br>With Indifference curve analysis, it is not possible to compare utility between individuals, or find the total utility for society as the economist hoped to do.
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<br>Q.02
<br>How can consumer attain optimum level of consumption in Cardinal Approach in case of:
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<br>a. One good consumed.
<br>In cardinal measurement of utility it assumes that the satisfaction provided by any good can be assigned a numerical, or cardinal, value by a utility function of the form. Therefore, the consumer is to maximize her utility by consuming until the marginal utility reaches zero. This means that consuming one more unit of good doesn't bring her any additional utility. Obviously this is the optimal level of consumption.
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<br>b. More than one good consumed.
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<br>In multi-goods case, the consumer is to maximize her utility by consuming until the marginal utility of each good becomes equal. This means that consuming one more unit of good 1 or good 2 brings her the same level of additional utility. Then the optimal level of consumption is achieved. Otherwise, say, if MU1>MU2, the consumer can consume more of good 1 than good 2 to achieve higher utility level.

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