Which leads to increase in the demand for a commodity when its price fall in the cardinal utility analysis?

Cardinal utility analysis of consumer's behaviour is based on which combination of the following assumptions:(i) Utility is measurable in terms of cardinal number.(ii) Constancy of the marginal utility of money(iii) Utilities of different goods are interdependent(iv) Gossen's first law of consumption (adsbygoogle = window.adsbygoogle || []).push({}); Choose the correct answer from the code given below:

1. Only (i) and (ii)
2. Only (i), (ii) and (iv)
3. Only (ii), (iii) and (iv)
4. Only (iii) and (iv)

Answer (Detailed Solution Below)

Option 2 : Only (i), (ii) and (iv)

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Cardinal utility analysis is the oldest theory of demand 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 of a product.

Assumptions of Cardinal Utility Analysis:

1. Rationality: Consumer behaves normally i.e, if goods are available he will purchase that or if goods become cheaper he will go in for the same. He will not make impulsive purchases.
2. Limited income: Limited income of a man will force him to make choice – i.e., to purchase one commodity another to be forgone.
3. Constant marginal utility of money: If the marginal utility of money changes with a change in income, then it cannot be used as a measuring rod. So it is assumed constant.
4. Measurability: The utility of each commodity is measurable. The quantity of money a consumer is ready to spend on buying any unit of a commodity is the utility of that unit to him.
5. The hypothesis of independent utility : It means an independent unit has independent utility & it ignores complementarity between goods.

On the basis of these assumptions, Prof. Alfred Marshall has shown that the additional benefit which a person derives from a given increase of his stock of anything diminishes with the growth of the stock that he has, known as the Law of diminishing marginal utility. 

Gossen's First Law:

In other words, the law tells that the marginal utility of a good for a person diminishes with every increase in the stock that he already has. Gossen's First Law is the "law" of diminishing marginal utility: that marginal utilities are diminishing across the ranges relevant to decision-making.

Therefore, the Utilities of different goods are interdependent is not an assumption of Cardinal utility analysis of consumer's behavior.

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