Question

Ordinal utility analysis of the consumers behaviour is considered superior to the cardinal utility analysis mainly due to ___________________.

• A. Assumption of the rationality of the consumers behaviour
• B. Possibility of the derivation of the consumers demand
• C. Bifurcation of price effects into income and substitution effects
• D. Consideration of the available limited resources for satisfying consumers demand

Answer 1

The correct option is C Bifurcation of price effects into income and substitution effects

Ordinal analysis of consumers' behaviour is more preferable than cardinal utility analysis because of the bifurcation of price effects into income and substitution effects.

Income effects: The income effect is the manner in which a consumer spends money or demands services and goods based on an increase or decrease in his income.

Substitution effect: The substitution effect is the change in consumption patterns due to a change in the relative prices of goods.