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(c) Both X and Y are similar preferences

Correct answer is (b) Gossen

(a) declining

(b) cardinal utility

The marginal rate of substitution is the rate at which one commodity can be substituted for another, while the level of satisfaction remains the same.

Correct answer is (b) Utility

M = X.P_x + YP_y.

Correct answer is (a) in 1934

(d) All of these

The convexity of indifference curves implies:

1. That the two goods are imperfect substitutes for one another.
2. That the Marginal Rate of Substitution (MRS) between the two goods decreases as a consumer moves along an indifference curve.

The marginal utility can be defined as the utility derived from the marginal or the last unit consumed.

TU_n = U₁ + U₂ + U₃ + U_n TU_n = Total utility of n units.

Total utility is defined as the sum of the utility derived from all the units consumed of the commodity.

Individual’s demand for a product depends on price of a product, income of an individual, the prices of related goods.

Utility means power of any commodity to satisfy wants.

It is the state in which a consumer is said to be in equilibrium when he is buying such a combination of goods as leaves him with no tendency to rearrange his purchase of goods.

Prof. J.R. Hicks and Prof. R.G.D. Allen.

Total utility falls when marginal utility is negative.

Consumption means using something, buying or eating.

Total utility is maximum when marginal utility is zero.

Since a person buys a product more, its marginal utility to the buyer will become less, until it reaches the point where the buyer does not have any (zero) requirement for any extra unit of service. At that point, the marginal utility of the next unit is equal to zero and this is called Zero Marginal Utility.

Positive Marginal Utility can be defined as that good which does not follow the law of Diminishing Marginal Utility. In this case, if a consumer consumes more of that commodity, the marginal utility of that goods rises.

Point of satisfaction.

\(MU_n =\frac {\textit{Change in total utilty}}{\textit{Change in Consumption}} \)

Total utility starts declining.

A person who purchases goods and services for personal use.

It is a line showing different possible combinations of Good-1 and Good-2, which a consumer can buy, given his budget and the prices of Good-1 and Good-2. Anywhere, on the budget line, a consumer is spending his entire income either on Good-1 or on Good-2 or on both Good-1 and Good-2.

Monotonic preference means that a rational consumer always prefers more of a commodity as it offers him a higher level of satisfaction.

The four principal properties of ICs are:

1. A higher IC (which is to the right and above another IC) offers a higher level of satisfaction.
2. ICs are convex to the origin, so that MRS tends to diminish.
3. ICs are negatively sloped, or they slope downward.
4. ICs never touch or intersect each other.

The cardinal analysis is based on assumptions given below:

1. Rationality
2. Limited money income
3. Maximisation of satisfaction
4. Utility is cardinally measurable
5. Diminishing marginal utility
6. Constant utility of money
7. Utility is additive.

There are two methods of utility analysis. 

These are:
(i) Cardinal Analysis : Cardinal or marginal utility analysis is an important theory of consumer’s behaviour which provides an explanation of consumer’s demand for a product and derives the law of demand which establishes an inverse relationship between price and quantity demanded for a product.

(ii) Ordinal Analysis : It is a powerful analytical tool of consumer analysis. Ordinal utility is not a quantity or a numerical value. It is only an expression of the consumer’s preference for one commodity over another or for one basket of goods over another.

It is tough to measure utility because it is based on psychological facts. The utility received by the consumption of commodity X can be different from the utility received by the consumption of commodity Y. Utility varies from place to place, time to time and person to person. It is conditionable.

The marginal utility analysis has a good number of uses and applications in both economic theory and policy. Following are the applications and uses of diminishing marginal utility:

(i) The law of diminishing marginal utility is of crucial significance in explaining determination of the prices of commodities. The discovery of the concept of marginal utility has helped to explain the contradiction of money which troubled Adam Smith in ‘The Wealth of Nations’. Adam Smith was greatly perplexed to know why water which is so very essential and useful to life has such a low price (indeed no price), while diamonds which are quite unnecessary, have such a high price. This value paradox is also known as Water-Diamond Paradox. But modern economists can solve it with the help of marginal utility concept. According to the modern economists, the total utility of a commodity does not determine the price of a commodity and it is the marginal utility which is crucially, an important determinant of price. Now, the water is available in abundant quantities so that its relative marginal utility is very low or even zero. Therefore, its price is low or zero.

(ii) Another important use of marginal utility is in the field of fiscal policy. In the modern welfare state, the Government redistributes income so as to increase the welfare of the people. This redistribution of income through imposing progressive income taxes on the rich sections of the society and spending the tax proceeds on social services for the poor people is based upon the diminishing marginal utility. The concept of diminishing marginal utility demonstrates that transfer of income from the rich to the poor will increase economic welfare of the community.

The main characteristics of indifference curve are the following:
(i) Indifference Curve has a Negative Slope : The negative slope of an indifference curve implies that the two goods are substitutes for one another. Therefore, if quantity of one commodity decreases, quantity of the other commodity must increase if the consumer has to stay at the same level of satisfaction.

(ii) Indifference Curves are Convex to Origin : The convexity of indifference curves implies :

(a) That the two goods are important substitutes for one another.
(b) That the marginal rate of substitution between the two goods decreases as a consumer moves along an indifference curve.

(iii) Indifference curves do not intersect nor are tangent to one another.

(a) diminishes from left to right

(d) All of these

Assumption of indifference curve analysis:

(i) More Part of Goods is Better Than the Least: It is believed that the consumer will always like a greater amount of quality goods, provided the other accessories remain unchanged in their disposal.

(ii) Preferences or Indifferences of a Consumer are Transitive : Suppose there are three combinations of two goods A, B and C. If the consumer is indifferent between A and B and C, it is then assumed that he will be indifferent between A and C too. This condition implies that consumer’s tastes are quite consistent. This assumption is known as Assumption of Transitivity.

(iii) Utility is Ordinal : It is truly believed that consumers can evaluate different combinations of the objects according to their liking.

(iv) Diminishing Marginal Rate of Substitution : This principle is related to the logical requirement that the particular desires are saturated and various goods are not the right choice for each other.