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In the context of cardinal utility, liberal economists postulate a law of diminishing marginal utility. This law states that the first unit of consumption of a good or service yields more satisfaction or utility than the subsequent units, and there is a continuing reduction in satisfaction or utility for greater amounts.
A single-attribute utility function maps the amount of money a person has (or gains), to a number representing the subjective satisfaction he derives from it. The motivation to define a utility function comes from the St. Petersburg paradox: the observation that people are not willing to pay much for a lottery, even if its expected monetary gain is infinite.
In practice, a consumer may not always pick an optimal bundle. For example, it may require too much thought or too much time. Bounded rationality is a theory that explains this behaviour. Examples of alternatives to utility maximisation due to bounded rationality are; satisficing, elimination by aspects and the mental accounting heuristic.
Total utility is the utility of an alternative, an entire consumption bundle or situation in life. The rate of change of utility from changing the quantity of one good consumed is termed the marginal utility of that good. Marginal utility therefore measures the slope of the utility function with respect to the changes of one good. [9]
A utility function is considered to be measurable, if the strength of preference or intensity of liking of a good or service is determined with precision by the use of some objective criteria. For example, suppose that eating an apple gives to a person exactly half the pleasure of that of eating an orange.
The utility (value) associated with every attribute level can be estimated, thus allowing the analyst to construct the total utility of any possible configuration (in this case, of car or phone). However, a DCE may alternatively be used to estimate non-market environmental benefits and costs. [20]
The further a curve is from the origin, the greater is the level of utility. The slope of the curve (the negative of the marginal rate of substitution of X for Y) at any point shows the rate at which the individual is willing to trade off good X against good Y maintaining the same level of utility. The curve is convex to the origin as shown ...
That is, the utility maximization problem is used by economists to not only explain what or how individuals make choices but why individuals make choices as well. The utility maximization problem is a constrained optimization problem in which an individual seeks to maximize utility subject to a budget constraint.