Assumption of Cardinal Utility Theory

Cardinal Utility Theory is a theory that explains how consumers make choices based on the satisfaction they derive from consuming goods and services. It is based on the following assumptions:

- Rational Consumer: Consumers are rational and seek to maximize their satisfaction by making choices that provide them with the highest level of utility.
- Constant Marginal Utility of Money: The marginal utility of money remains constant as the consumer acquires more of it.
- Independent Utilities: The utility derived from one good is independent of the utility derived from other goods.
- Law of Diminishing Marginal Utility: As a consumer acquires more of a good, the marginal utility derived from each additional unit of the good decreases.

Assumption that ignores the presence of complementary and substitute goods

The assumption that ignores the presence of complementary and substitute goods in Cardinal Utility Theory is the assumption of Independent Utilities. This assumption assumes that the utility derived from one good is independent of the utility derived from other goods. However, the presence of complementary and substitute goods can affect the utility derived from a particular good.

Complementary goods are goods that are usually consumed together. The utility derived from one good depends on the availability and price of the complementary good. For example, the utility derived from a car depends on the availability and price of gasoline.

Substitute goods are goods that can be used in place of each other. The utility derived from one good can be affected by the availability and price of substitute goods. For example, the utility derived from a branded shoe can be affected by the availability and price of similar shoes from other brands.

Conclusion

In conclusion, the assumption of Independent Utilities in Cardinal Utility Theory ignores the presence of complementary and substitute goods. The presence of these goods can affect the utility derived from a particular good. Therefore, it is important to consider the presence of complementary and substitute goods when making choices based on utility.