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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 good or service, for instance mobile (cell) phone, is typically described by a number of attributes (features). Phones are often described by shape, size, memory, brand, etc. The attributes to be varied in the DCE must be all those that are of interest to respondents.
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 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 ...
Under the standard assumption of neoclassical economics that goods and services are continuously divisible, the marginal rates of substitution will be the same regardless of the direction of exchange, and will correspond to the slope of an indifference curve (more precisely, to the slope multiplied by −1) passing through the consumption bundle in question, at that point: mathematically, it ...
The notion of social utility is analogous to the notion of a utility function in consumer choice. However, a social welfare function is different in that it is a mapping of individual utility functions onto a single output, in a way that accounts for the judgments of everyone in a society.