Answer to Question #171512 in Microeconomics for Christopher Buntum

Question

The utility approach to consumer demand theory is based on the assumption of cardinal utility, while the indifference curve approach is based on ordinal utility. Which approach is better? Why.

Answer 1

The utility approach to consumer demand theory is anchored on the assumption of cardinal utility, while the indifference curve approach is based on ordinal utility. The two approaches are best but they differ in some ways. The ordinal utility approach is better, because it utilizes ranks, according to which some choices are more preferable than other. On the other hand, ordinal utility theory states that while the utility of a particular good or service cannot be measured using a numerical scale bearing economic meaning in and of itself, pairs of alternative combinations of goods can be ordered such that it is considered by an individual to be worse than, equal to, or better than the other. This contrasts with cardinal utility theory, which ideally treats utility as something whose numerical value is meaningful in its own right.