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Question
Explain the Law of Equi-Marginal Utility
Solution
Law of Equi-Marginal Utility states that a consumer allocates his expenditure on various commodities in such a manner that the utility derived from each additional unit of the rupee spent on each of the commodities is equal. Algebraically, this is represented as the following equality.
`("MU"_x)/("P"_x) =("MU"_y)/("P"_y) = ("MU"_m)/("P"_n) = ..."MU"_m`
In the above figure, OO1 represents the total income of a consumer. MUx and MUy represent the Marginal Utility curves of commodity x and commodity y, respectively. Point E represents the point of consumer's equilibrium, where:
`("MU"_x)/("P"_x) = ("MU"_y)/("P"_y) = "MU"_m`
At this point, OM amount of income is spent on commodity x and the remaining amount of income MO1 is spent on commodity y.
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