Utility Theory

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1. Explain the behavior of consumer from the point of view of Utility Theory. As consumers, we are constantly forced into making choices. They face a variety of goods and services which can be purchased, but often are limited by the amount of money with which those purchases can be made. The utility theory, also sometimes referred to as the consumer behavior theory, is often used to explain the behavior of individual consumers and the amount of satisfaction a consumer derives from the consumption of goods and services. The theory of consumer behavior explains how people can best utilize their resources to achieve the highest level of satisfaction possible. According to Mr. Hirschey, the utility theory hinges on three basic assumptions: First, more is better, is described as consumers preferring more of a particular good or service. The second is that consumer preferences are complete, which allows the consumer to prioritize the assumed benefits of consumption. Finally, preferences are transitive, which enables the consumer to make a decision based on the desirability of consumption of a particular good or service. All of these assumptions help businesses gain a better understanding of the consumer they wish to attract, while providing economists and those that study consumers a better understanding of the habits of consumers. There are a several other concepts of importance that are observed; the first approach is the marginal utility. According to the marginal utility theory, consumers should benefit from consumption of an extra unit of goods or services. For example, let’s look at the consumption of a candy bar. Let’s say a consumer purchases a candy bar every Friday for a month. If you were to survey this individual every week we would expect to see an increase in satisfaction each week. The second point is the law of diminishing marginal utility. The law of diminishing marginal utility states that, as a consumer consumes more of a specific product or service,...
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