Question

Answer in detail:
State and explain the law of DMU ? Explain its assumptions.

Answer 1

• Law of Diminishing Marginal Utility (DMU) states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing.
  
• People spend their income on various goods because consuming more and more of any one good reduces the marginal satisfaction obtained from further consumption of the same good.
• Law of DMU has universal applicability and applies to all goods and services.
  

Assumptions of DMU:

• Cardinal measurement of utility: it is assumed that utility can be measured and it can be expressed in numerical terms as 1, 2, 3, etc.
  
• Monetary measurement of utility: it is assumed that utility can be measured in monetary terms.
  
• Continuous consumption: it is assumed that consumption is a continuous process. For example, if one ice-cream is consumed in the morning and another in the evening, then second ice-cream may provide equal or higher satisfaction.
  
• No change in quality: quality is assumed as uniform and constant.
  
• Fixed income and prices: it is assumed that income of the consumer and prices of the goods are assumed to be constant.