A rational consumer will maximize his utility
subject to their budget constraint or income.
A consumer will be at equilibrium when he allocates his given income in the purchase of different goods in such a way that he maximizes his utility.
Law of Equi-Marginal Utility solves the above problem of consumers.
A consumer will be at equilibrium when he allocates his given income in the purchase of different goods in such a way that he maximizes his utility.
Law of Equi-Marginal Utility solves the above problem of consumers.
The law says
that-
“The Consumer maximizing his total utility will allocate his income among various commodities in such a way that the marginal utility of the last unit of money (rupee) spent on each commodity is equal.”
“The Consumer maximizing his total utility will allocate his income among various commodities in such a way that the marginal utility of the last unit of money (rupee) spent on each commodity is equal.”
Now, to understand what is - marginal utility of the last unit of money is (rupee) spent on each commodity
Marginal
utility of a rupee we spend on a good say ‘X’ is calculated by
( MUx / Px )
( MUx / Px )
Where, MUx is marginal utility of the good
‘X’ and Px is the price
Similarly, Marginal
utility of a rupee we spend on a good say ‘Y’ is
calculated by ( MUy / Py )
calculated by ( MUy / Py )
Now we will understand why a
consumer maximizes his total utility when the marginal utility of the last
rupee spent on each good is equal.
If
a consumer is getting more utility form a rupee spend on commodity X than with Y,
he will switch one rupee from Y to get commodity X. Thus total utility of his
will rise.
The utility maximizing consumer will continue
to switch his expenditure from Y to X as long as one rupee spent on X brings
him more utility than Y.
This
will leads to more quantity of X and less of Y. But remember the law of diminishing
marginal utility (with increase in each
successive units, the utility derived from the additional unit goes on
decreasing), marginal utility derived from X will start falling.
This
process of reallocation of expenditure will ultimately lead to equalization of
marginal utility of last rupee spent on each of the two commodities.
This is the satiation point for the consumer, he will not gain by further reallocation of expenditure from commodity Y to commodity X.
This is the satiation point for the consumer, he will not gain by further reallocation of expenditure from commodity Y to commodity X.
(MUx / Px) = (MUx / Py) = MU per unit of money
Let us illustrate the law of
equi-marginal utility by taking a numerical example:
Calculate
which combination of goods A and B provide maximum utility to the consumer?
Units
|
MUx
|
MUy
|
MUx/Px
|
MUy/Py
|
1
|
10
|
30
|
5
|
7.5
|
2
|
8
|
24
|
4
|
6
|
3
|
6
|
20
|
3
|
5
|
4
|
4
|
16
|
2
|
4
|
5
|
2
|
14
|
1
|
3.5
|
6
|
1
|
8
|
0.5
|
2
|
