Question

Under the Cardinal utility approach, the marginal utility of money is assumed to be:

• A. High
• B. Low
• C. Zero
• D. Not constant

Hint:

Exam Tip: The assumption of constant marginal utility of money is a major criticism of the cardinal utility approach. In reality, the marginal utility of money changes with a person's wealth (a poor person values money more than a rich person).

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
This question tests the assumptions of the Cardinal Utility Approach, which is the traditional approach to consumer behavior developed by Alfred Marshall.

Step 2: Assumptions of Cardinal Utility Approach:
The key assumptions of the cardinal utility approach include:

• Utility is measurable in cardinal numbers (utils).
• The marginal utility of money is constant. This is a crucial assumption. However, the question asks for the value.
• Consumers are rational and aim to maximize utility.
• The law of diminishing marginal utility holds.

Step 3: Analyzing the Marginal Utility of Money:
In the cardinal utility approach, to make the analysis work, it is assumed that the marginal utility of money is constant.
This means that the utility derived from the last unit of money spent remains the same, regardless of the amount of money the consumer has.
However, if it must be assigned a value, it is assumed to be low and constant. This allows us to use money as a measure of utility without having to worry about its own changing utility.
Therefore, while the marginal utility of money is assumed to be constant, its magnitude is considered to be low or negligible.

Step 4: Final Answer:
Under the Cardinal utility approach, the marginal utility of money is assumed to be low (and constant). Therefore, option (B) is correct.