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Concept
Cardinal utility
Summary
In economics, a cardinal utility function or scale is a utility index that preserves preference orderings uniquely up to positive affine transformations. Two utility indices are related by an affine transformation if for the value of one index u, occurring at any quantity of the goods bundle being evaluated, the corresponding value of the other index v satisfies a relationship of the form
for fixed constants a and b. Thus the utility functions themselves are related by
The two indices differ only with respect to scale and origin. Thus if one is concave, so is the other, in which case there is often said to be diminishing marginal utility.
Thus the use of cardinal utility imposes the assumption that levels of absolute satisfaction exist, so that the magnitudes of increments to satisfaction can be compared across different situations.
In consumer choice theory, ordinal utility with its weaker assumptions is preferred because results that are just as strong can be derived. Cardinal utility shows that the unit we consume can be measured in numbers. It is a less practical form of measuring satisfaction compared to Ordinal utility.
In 1738, Daniel Bernoulli was the first to theorize about the marginal value of money. He assumed that the value of an additional amount is inversely proportional to the pecuniary possessions which a person already owns. Since Bernoulli tacitly assumed that an interpersonal measure for the utility reaction of different persons can be discovered, he was then inadvertently using an early conception of cardinality.
Bernoulli's imaginary logarithmic utility function and Gabriel Cramer's U=W1/2 function were conceived at the time not for a theory of demand but to solve the St. Petersburg's game. Bernoulli assumed that "a poor man generally obtains more utility than a rich man from an equal gain" an approach that is more profound than the simple mathematical expectation of money as it involves a law of moral expectation.
Early theorists of utility considered that it had physically quantifiable attributes.
Official source
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