The Measurement of Utility

There is an important difference between the marginal utility theory of consumer demand and the indifference curve theory. The marginal utility theory assumes that utility is numerically measurable, that is, that the consumer can say how much extra utility he or she derives from each extra unit of A or B. The consumer needs that information to realize the utility-maximizing (equilibrium) position, as indicated by

Marginalutilityof A Price of A

Marginalutilityof B Price of B

Quantity of B

The consumer's equilibrium position is represented by point X, where the black budget line is tangent to indifference curve I3. The consumer buys four units of A at $1.50 per unit and six of B at $1.00 per unit with a $12 money income. Points Z and Y represent attainable combinations of A and B that yield less total utility, as is evidenced by the fact that they are on lower indifference curves. Point Wwould entail more utility than X, but it requires a greater income than the $12 represented by the budget line.

PB/PA. We therefore deduce that ginal utility approach to the ratio of the two products.2

The indifference curve approach imposes a less stringent requirement on the consumer, who need only specify whether a particular combination of A and B will yield more, less, or the same amount of utility than some other combination of A and B. The consumer need only say, for example, that six units of A and seven of B will yield more (or less) satisfaction than four of A and nine of B. Indifference curve theory does not require that the consumer specify how much more (or less) satisfaction will be realized.

When we compare the equilibrium situations in the two theories, we find that in the indifference curve analysis, the MRS equals PB/PA at equilibrium; however, in the marginal utility approach, the ratio of marginal utilities equals at equilibrium, the MRS is equivalent in the mar-of the marginal utilities of the last purchased units

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