Question

Explain the 'Law of Equi-Marginal Utility' in the analysis of consumer’s equilibrium.

Hint:

To achieve equilibrium, a consumer allocates their budget where the marginal utility per rupee spent on each good is equal.

Answer 1

Step 1: Define Equi-Marginal Utility.
The Law of Equi-Marginal Utility states that a consumer will allocate their limited income between goods in such a way that the marginal utility per unit of money spent is equal for all goods. This maximizes total satisfaction or utility.
Step 2: Mathematical Representation.
If a consumer spends their income \(I\) on goods \(X\) and \(Y\), the equilibrium condition for the consumer is: \[ \frac{MU_X}{P_X} = \frac{MU_Y}{P_Y} \] where \(MU_X\) and \(MU_Y\) represent the marginal utilities of goods \(X\) and \(Y\), and \(P_X\) and \(P_Y\) are their respective prices. The consumer reaches equilibrium when the ratio of marginal utility to price is the same for all goods.
Step 3: Diagrammatic Representation.
In an indifference curve diagram, the consumer's equilibrium is achieved where the budget line is tangent to the highest possible indifference curve. This represents the point at which the consumer cannot increase utility by reallocating their income.
Step 4: Conclusion.
Thus, the law of equi-marginal utility explains how consumers make choices to maximize their satisfaction by equalizing the marginal utility per unit of money spent on each good. Final Answer: \[ \boxed{\text{The Law of Equi-Marginal Utility ensures consumer equilibrium by equalizing the marginal utility per rupee spent on all goods.}} \]