Q. 6

# Explain the law o

The law of diminishing marginal utility states that when a consumer consumes more and more units of a commodity, the marginal utility derived from the consumption of each additional unit of the commodity falls.

This law is based on the following assumptions:

a. Rational behaviour of the consumer.

b. Cardinal measurability of utility.

c. The utility should be able to be measured in terms of money and the marginal utility of money remains constant.

d. The price of the commodity, price of the Other commodities, income status of the consumer and any other factor that can affect the utility is constant during the act of the confirmation.

a. Initially, as the consumer begins to consume the good his marginal utility continuous to fall but remains positive. When he consumes the first unit of the good his marginal utility derived is 8 units. This continues to fall.

b. When he consumes the 4th unit, his marginal utility falls to 2 but remains positive.

c. When he consumes the 5th unit, his marginal utility becomes zero. If he consumes additional units, his marginal utility will now become negative.

d. The highest point of saturation was the 5th unit.

OR

a. According to the demand of the law, more quantity will be demanded if there is a fall in the price and less quantity will be demanded when there is a rise in the price.

b. This is based on the assumption that other things are constant.

c. There is a negative relationship between the price of the commodity and the quantity demanded of the commodity.

d. The demand for a commodity is a function of its price:

D(x) = f(Px)

The demand for Good X = function of the price of good X

This law is based on the following assumptions:

a. Price of the other related goods remains constant.

b. The income of the consumer is constant.

c. Taste and preferences of the consumer are constant.

d. There is no expectation about future change in price.

According to the law of demand there exist an inverse relationship between the price of the good and the demand of the good. This is explained in the above demand schedule. When the price of the good was 10, 100 units of the commodity was demanded.

When the price of the good was 20, 75 units of the commodity was demanded.

When the price of the good was 30, 50 units of the commodity was demanded.

This shows that with the increase in the price, the quantity demanded of the commodity continues to fall

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