Question

What is the law of equimarginal utility? Explain the law of equimarginal utility of consumer equilibrium.

Hint:

The law of equimarginal utility helps in determining how a rational consumer allocates their budget across goods to maximize total utility.

Answer 1

The Law of Equimarginal Utility states that a consumer will allocate their income in such a way that the marginal utility (MU) derived from each good or service purchased is equal, given the prices of those goods. In simpler terms, consumers maximize their total utility by spending their money in a way that the last unit of currency spent on each good provides the same level of marginal utility. - Consumer Equilibrium: The consumer reaches equilibrium when the ratio of the marginal utility to price is equal for all goods. This condition can be mathematically expressed as: \[ \frac{MU_X}{P_X} = \frac{MU_Y}{P_Y} = \dots = \frac{MU_n}{P_n} \] Where \( MU_X, MU_Y, \dots \) are the marginal utilities of goods \( X, Y, \dots \), and \( P_X, P_Y, \dots \) are their respective prices. This means that the consumer will distribute their budget so that the marginal utility per rupee spent on each good is equal across all goods.