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Why is ordinal utility theory considered a better step ahead than the commercial utility theory when analyzing consumer behavior?
Why is ordinal utility theory considered a better step ahead than the commercial utility theory when analyzing consumer behavior?
Expert Solution
The ordinal utility approach argues that goods are not measurable but can undergo transfer. The service that a good owns is more psychological, and quantity value does not account for it. Ordinal utility measures the preference of more than one product, unlike commercial service. Besides, it also classifies goods into complements and substitutes, which make differentiation of goods more clear. It also explains the impact of price variations in revenues and substitutes.
Moreover, it measures the impact of income variations on the consumer's utilization. It applies the law of diminishing marginal rate of substitution, which does not suffer from quantitative measurements of goods. Application of this law has led to more reality of the field of economy, unlike when using marginal utility diminishing code in the commercial utility. Therefore, ordinary utility theory should be the preferred step than the commercial service when carrying out the activity of consumer behavior.
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