Equi Marginal Utility

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Law of Equi Marginal Utility

Law of Equi Marginal Utility deals with the case of Consumer’s Equilibrium , where the consumer spends income on Two commodities. Law of Equi Marginal Utility provides that where the consumer spends income on two commodities, he achieves maximum satisfaction when the following conditions are satisfied : –

  • MU of two commodities and their respective prices are equal

For two given commodities x and y

\cfrac { \quad MUx }{ Px } \quad =\quad \cfrac { MUy }{ Py } \quad =\quad MUm

and

  • MU falls with an increase in consumption – If this condition is not satisfied, the consumer will keep buying only one good , which is unrealistic and consumer will never reach the equilibrium position.

For Example : –

Lets say the  total income of a consumer is Rs.20. He intends to purchase two commodities x and y, which are priced at Rs. 4 each per unit .

Based on the Law of Equi Marginal Utility,  Consumer’s equilibrium in case of commodities  x and y is as under :-

Units ConsumedMux (“units”)MUy (“units”)
14032
22824
32416
41414
5106

 

From the above table, given that commodity ‘x’  has utility of 40 utils as against 32 utils of commodity y, consumer would spend first rupee on commodity x. Similarly, the second rupee will be spent on commodity ‘y’ to get utility of 32 utils, as utils of commodity x for second rupee is 28. The consumer would reach equilibrium when : –

  • MU of last rupee spent on each commodity is same – 4 units consumed
  • MU falls as consumption increases
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