Write a short note on assumptions of ordinal utility approach
Rationality
Transitivity
Ordinal utility
Non satiety
Diminishing marginal rate of substitution
The ordinal utility approach assumes several key assumptions:
1. Rationality: It assumes that individuals are rational and make choices based on their preferences. They aim to maximize their utility or satisfaction.
2. Transitivity: It assumes that preferences are transitive, meaning that if individual A prefers option X over Y, and Y over Z, then A also prefers X over Z. This ensures consistency in decision-making.
3. Ordinal utility: Unlike the cardinal utility approach, the ordinal utility approach only ranks options in terms of preference. It assumes that individuals can only compare and rank their preferences, but cannot quantify the extent of satisfaction they derive from each option.
4. Non-satiety: It assumes that individuals always prefer more of a good to less. This means that as individuals consume more of a particular good, their satisfaction or utility increases.
5. Diminishing marginal rate of substitution: This assumption suggests that individuals are willing to substitute one good for another, but at a decreasing rate. In other words, individuals are less willing to give up a larger amount of one good to obtain a small increase in another good. This reflects the concept of the law of diminishing marginal utility.
Overall, the assumptions of the ordinal utility approach provide a framework for understanding how individuals make rational choices based on their preferences and rank options accordingly.