Explain how the process of production adds utility to an object; Explain the characteristics of utility; State the classification of utility; State the forms of utility; Explain the measurement of utility; Explain total utility; Explain marginal utility; Discuss relationship of Total utility and Marginal Utility. (Diagrammatically as well); Explain assumptions of diminishing marginal utility.; Discuss consumer's equilibrium through cardinal utility approach (marginal utility approach). By now, you are clear about indifference curves and the budget line. Let’s look at consumers equilibrium next. A consumer is in equilibrium when he derives maximum satisfaction from the goods and is in no position to rearrange his purchases. From the figure, we can see that the combinations R, S, Q, T, and H cost the same to the consumer. In order to maximize his level of satisfaction, the consumer will try to reach the highest indifference curve. Since we have assumed a budget constraint, he will be forced to remain on the budget line.
Let’s say that he chooses the combination R. From Fig. 1, we can see that R lies on a lower indifference curve – IC 1 . He can easily afford the combinations S, Q, or T which lie on the higher ICs. Even if he chooses the combination H, the argument is similar since H lies on the curve IC 1 too.
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