Answer the following question in detail (any two): Explain the law of diminishing marginal utility and write its assumptions.

Answer:

Introduction: The law of diminishing marginal utility was explained by Prof. Alfred Marshall. It is based on the common experience that as a person consumes more units of a commodity, the satisfaction from each additional unit goes on falling.

Statement: According to Marshall, “Other things remaining constant, the additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has.”

Explanation with schedule:

MU falls as consumption increases. When MU is positive, TU rises; when MU is zero (6th unit), TU is maximum (point of satiety); when MU becomes negative (7th unit), TU falls.

[Diagram: Units of the commodity on the X-axis and utility on the Y-axis. The MU curve slopes downward from left to right, touches the X-axis at the 6th unit and goes below it after that. The TU curve rises at a diminishing rate, reaches its maximum at the 6th unit and then falls.]

Assumptions:

1. Rationality: The consumer is rational and aims at maximum satisfaction.
2. Cardinal measurement: Utility can be measured in numbers (utils) or in money.
3. Homogeneity: All units of the commodity are identical in size, quality, taste etc.
4. Continuity: Units are consumed one after another without a time gap.
5. Reasonable size of units: Units are neither too small nor too big.
6. Constancy: Tastes, habits, income and preferences of the consumer and prices of the commodity and its substitutes remain constant.
7. Constant marginal utility of money: The MU of money remains the same.

Exceptions/criticisms (in brief): hobbies and collections (stamps, coins), money, misers, music and poetry, and addictions such as liquor, where MU may appear to rise. Utility is also a psychological concept and cannot actually be measured cardinally.