Explain the law of diminishing marginal utility using a hypothetical schedule.

OR

What is the budget line? Why the budget line is left to right downward sloping?

The law of diminishing marginal utility states that when a consumer consumes more and more units of a commodity, the marginal utility derived from the consumption of each additional unit of the commodity falls.

This law is based on the following assumptions:

a. Rational behavior of the consumer.

b. Cardinal measurability of utility.

c. The utility should be able to be measured in terms of money and the marginal utility of money remains constant.

d. The price of the commodity, price of the Other commodities, income status of the consumer and any other factor that can affect the utility is constant during the act of the confirmation.

a. Initially, as the consumer begins to consume the good his marginal utility continuous to fall but remains positive. When he consumes the first unit of the good his marginal utility derived is 8 units. This continues to fall.

b. When he consumes the 4th unit, his marginal utility falls to 2 but remains positive.

c. When he consumes the 5th unit, his marginal utility becomes zero. If he consumes additional units, his marginal utility will now become negative.

d. The highest point of saturation was the 5th unit.

OR

The budget line is a graphical representation of all those combinations of two goods which will cost the consumer exactly is income.

The budget line sloping downwards because to buy more of one good,the consumer has to reduce the purchase of Other goods as the income remains the same.