ONE OF THE ASSUMPTIONS OF ORDINAL UTILITY THEORY IS THAT

• A. choice is not consistent
• B. utility can be ranked ✓
• C. total utility is a function of price
• D. satisfaction is measurable

This assumption is fundamental to the concept of ordinal utility theory, which is a theory in economics that states that individuals can only rank their preferences and cannot assign specific numerical values to their satisfaction or utility from consuming goods and services. In ordinal utility theory, the focus is on the order of preferences rather than the magnitude of satisfaction or utility.

Ordinal utility theory assumes that individuals can rank their preferences based on their subjective evaluations of the desirability of different goods and services. This ranking allows individuals to make choices based on their preferences, even if they cannot quantify or measure the exact level of satisfaction or utility derived from each option.

This assumption is important in understanding consumer behavior and decision-making processes in economics. By recognizing that individuals can rank their preferences, economists can analyze how consumers make choices based on their subjective evaluations of utility and how these choices are influenced by factors such as prices, incomes, and tastes.

In other words, ordinal utility theory focuses on the ordering of preferences rather than the measurement of the strength of those preferences. This assumption is a fundamental aspect of ordinal utility theory, as it allows for the comparison and ranking of different choices based on an individual’s preferences.

Ordinal utility theory was developed as a response to the limitations of cardinal utility theory, which attempts to measure the strength or intensity of preferences using numerical values. Ordinal utility theory does not require such measurements and instead focuses on the simple ordering of preferences. This makes it a more flexible and practical approach for modeling decision-making in real-world situations where precise measurements of preference intensities may not be available or feasible.

It is important to note that this assumption does not imply that individuals have complete and consistent preferences over all possible options. Rather, it only requires that individuals are able to rank their preferences among a given set of alternatives. Inconsistencies or incompleteness in preferences can still exist within this framework, but they do not violate the assumption of ordinality as long as a ranking can still be established among the available alternatives.