Question : In the cardinal utility approach, consumer's equilibrium is achieved when:
Option 1: Total utility is maximized.
Option 2: Marginal utility is maximized.
Option 3: Marginal utility equals zero.
Option 4: Marginal utility per dollar spent is equal across all goods.
Correct Answer: Marginal utility per dollar spent is equal across all goods.
Solution : The correct answer is (d) Marginal utility per dollar spent is equal across all goods.
In the cardinal utility approach, consumer's equilibrium is achieved when the marginal utility per dollar spent is equal across all goods. This means that the consumer is getting the same amount of satisfaction from each additional dollar spent on any good.
For example, if a consumer is spending $\$ 1$ on a loaf of bread and getting 10 units of utility from it, and they are also spending $\$ 1$ on a gallon of milk and getting 10 units of utility from it, then they are at equilibrium. This is because they are getting the same amount of satisfaction from each additional dollar spent on either good.
If the consumer were to spend more on bread and less on milk, they would be getting more satisfaction from bread and less satisfaction from milk. This would not be an equilibrium situation, because the consumer could increase their overall satisfaction by spending more on milk and less on bread.
The cardinal utility approach is based on the assumption that utility can be measured in units. This is a controversial assumption, and many economists prefer to use the ordinal utility approach, which does not require the assumption that utility can be measured.
