Cardinal utility is the idea that economic welfare can be directly observable and be given a value.
For example, people may be able to express the utility that consumption gives for certain goods.
For example, if a Samsung mobile phone gives 650 units of utility, an iPhone would give 700 units.
Cordial utility is important for welfare economics which tries to put values on consumption.
We can express as formula i.e. Marginal cost = Marginal Utility
One way to try and put values on goods utility is to see what price they are willing to pay for a good.
If we are willing to pay $700 for iPhone, we can suppose we must get 700 utils.
Utils is the unit of utilities.
In other words, the value of cardinal utility is related to the price consumers are willing to pay.
The idea of cardinal utility is important to rational choice theory.
This idea is based on that consumers make optimal choices to maximise their utility.
Utility is a psychological phenomenon or subjective phenomena.
It resides inside the mind of consumer.
Hence, its measurement is as doubtful as the measurement of other psychic phenomena such as love, pain, intelligent, etc.
All the examples given to illustrate the diminishing marginal utility are artificial; such as consumption in short period without break.
The diminishing utility is not applicable in all cases for all goods and all consumers.
The theory cannot explain the consumer’s behavior in case of increasing marginal utility.
The theory assumes marginal utility of money is constant.
The assumption is made in order to measure the utility in monetary units but it is doubtful because the marginal utility of money cannot be the same for rich and poor.
Marginal utility of money varies person to person and time to time depending upon the situation of consumer.
The theory assumes consumer is fairly rational persons who have perfect information required to maximize utility.
However, in practice, it is very difficult to find a rational consumer as imagined by the theory.
This law assumes that utilities derived from various goods are independent.
In reality, utilities from various goods are dependent to each other.
The theory cannot explain the income and substitution effects of a price change.
Consequently the theory cannot recognize the necessary, inferior; Giffen and luxury goods and cannot explain the demand curve for those goods.
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