Utility is most closely defined as _ a. satisfaction b. the purchasing power of individuals c. a medium of exchange d. welfare maximization e. an opportunity cost
The correct answer and explanation is:
Correct Answer: a. satisfaction
Explanation:
Utility is most closely defined as satisfaction, which refers to the pleasure or benefit that a person receives from consuming a good or service. In economics, utility is a fundamental concept used to explain how individuals make choices based on their preferences and desires. It reflects how much a consumer values a product or service and how much happiness or usefulness it brings.
When individuals make decisions about what to buy or consume, they are assumed to be aiming to maximize their total utility. For example, if someone buys a slice of pizza, it is because that slice of pizza is expected to provide a certain level of satisfaction or enjoyment. If the satisfaction from one slice is high, the person may choose to buy another slice. This decision-making process continues until the additional satisfaction gained from each extra slice (marginal utility) begins to diminish. This principle is known as the law of diminishing marginal utility, where each additional unit of a good provides less additional utility than the previous one.
Utility can be measured in both cardinal and ordinal terms. Cardinal utility assigns numerical values to satisfaction, while ordinal utility simply ranks preferences without assigning specific numbers.
Economists also distinguish between total utility (the overall satisfaction from all units consumed) and marginal utility (the extra satisfaction from consuming one more unit). Understanding utility helps in analyzing consumer behavior, pricing strategies, and resource allocation.
The other options listed are related to economics but do not capture the core meaning of utility:
- b. purchasing power refers to the ability to buy goods
- c. a medium of exchange defines money
- d. welfare maximization is a broader goal in economics
- e. opportunity cost is the value of the next best alternative forgone
Therefore, the best definition of utility is satisfaction.