Cardinal Theory:
An Introduction In cardinal approach, utility is measured cardinally or numerically in terms of money. The consumer not only knows which one is preferred but also by what amount. The assumptions of this approach is given below:
1) Consumer is rational. Implication: The consumer's objective is to maximise her utility by choosing one of the commodity bundle from all other available commodity bundles at given prices of commodities and money income.
2) If the taste and preferences are given, the total utility of the consumer depends on the quantity of consumption.
3) Goods are good. Implication: Let 'U' denote utility level of the consumer and let 'x' be the consumption bundle. As 'x' increases (decreases) 'U' increases (decreases). Therefore, marginal utility is positive.
4) Marginal utility of 'x' is diminishing. Implication: As 'x' increases (decreases) MUx decreases (increases). Therefore, MUx curve is downward sloping
5) Utility is measured cardinally or numerically in terms of money.
Implication: Since it is measured numerically consumer not only knows which commodity bundle is preferred but also by how much amount.
6) Marginal utility of money is constant.
Implication:
MU_{m} =λ where λ is positive and constant. That means as money income increases (decreases) by one unit, utility increases (decreases) by λ unit.