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Law of Equi-Marginal Utility

The law of equi-marginal utility states that a consumer can maximize total utility from a fixed income by allocating spending across goods such that the marginal utility derived from the last unit of each good is equal. This occurs when the consumer spends their money in a way that equalizes the marginal utility obtained from each item. The law is demonstrated with a schedule and diagram showing that as a consumer divides a fixed budget between apples and bananas, total utility is maximized when additional spending on either good yields the same marginal utility.

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Ghalib Hussain
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2K views

Law of Equi-Marginal Utility

The law of equi-marginal utility states that a consumer can maximize total utility from a fixed income by allocating spending across goods such that the marginal utility derived from the last unit of each good is equal. This occurs when the consumer spends their money in a way that equalizes the marginal utility obtained from each item. The law is demonstrated with a schedule and diagram showing that as a consumer divides a fixed budget between apples and bananas, total utility is maximized when additional spending on either good yields the same marginal utility.

Uploaded by

Ghalib Hussain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Utility

Q: Define and explain with the help of schedule and diagram the Law of Eqi-Marginal
Utility.
Definition:
"A person can get maximum utility with his given income when it is spent on different
commodities in such a way that the marginal utility of money spent on each item is equal".

It is clear that consumer can get maximum utility from the expenditure of his limited income. He
should purchase such amount of each commodity that the last unit of money spend on each item
provides same marginal utility.

Assumptions of the Law of Equi Marginal Utility:

1. There is no change in the prices of the goods.


2. The income of consumer is fixed.
3. The marginal utility of money is constant.
4. Consumer has perfect knowledge of utility obtained from goods.
5. Consumer is normal person so he tries to seek maximum satisfaction.
6. The utility is measurable in cardinal terms.
7. The goods have substitutes.

Explanation With Schedule and Diagram:


The law of substitution can be explained with the help of an example. Suppose consumer has six
rupees that he wants to spend on apples and bananas in order to obtain maximum total utility. The
following table shows marginal utility (MU) of spending additional dollars of income on apples
and bananas:
Money
MU of apples MU of bananas
(Units)
1 10 8
2 9 7
3 8 6
4 7 5
5 6 4
6 5 3

The same information can be used for graphical presentation of this law:
10
MU of Apples 9 MU of Bananas
8
7
6
5
4
3
2
1

6 5 4 3 2 1 1 2 3 4 5 6

The diagram shows that consumer has income of six rupees. He wants to spend this money on
apples and bananas in such a way that there is maximum satisfaction to the consumer.

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