Question

What is ordinal utility?

Hint:

Ordinal utility involves ranking goods based on consumer preferences without quantifying the level of satisfaction.

Answer 1

Step 1: Defining Ordinal Utility:
Ordinal utility is a concept in economics that measures the satisfaction or preference of consumers in terms of rankings or order. It does not attempt to quantify the level of satisfaction but instead ranks different goods or bundles of goods based on consumer preferences. Ordinal utility assumes that consumers can compare and rank different options without assigning specific numerical values to them.
Step 2: Key Features of Ordinal Utility:
- Preference Ranking: Consumers rank goods or services in order of preference. For example, a person may prefer good A to good B and good B to good C.
- No Measurement of Utility: Ordinal utility does not assign numerical values to the satisfaction derived from a good, unlike cardinal utility, which tries to measure the exact satisfaction level.
Step 3: Examples of Ordinal Utility:
If a consumer prefers food over clothes, and clothes over electronics, ordinal utility will rank the goods in the following order: food>clothes>electronics. However, it does not specify by how much the consumer prefers food to clothes or clothes to electronics.
Step 4: Final Conclusion:
Ordinal utility is based on preference rankings rather than measurable satisfaction. It is a more realistic approach in consumer theory, as it avoids the need for assigning numerical values to utility.