Question

Explain the law of Equi-marginal utility.

Answer 1

To satisfy unlimited wants a consumer needs more than one commodity. So, the law of diminishing marginal utility is extended and is called the “Law of Equi-marginal utility”. It is also called the “Law of substitution” “The law of consumer’s equilibrium”, “Gossen second law” and “The law of maximum satisfaction”.

Definition:
Marshall states the law as, “If a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all. For if it had a greater marginal utility in one use than another he would gain by taking away some of it from the second use and applying it to first”.

• Assumptions:

1. The rational consumer wants to maximize his satisfaction.
2. The utility is measurable cardinally.
3. The marginal utility of money remains constant.
4. The income of the consumer is given.
5. There is perfect competition in the market.
6. The prices of the commodities are given.
7. The law of diminishing marginal utility operates.

• Explanation:
  The law can be explained with the help of an example. Suppose a consumer wants to spend his limited income on Apple and Orange. He is said to be in equilibrium, only when he gets maximum satisfaction with his limited income. Therefore, he will be in equilibrium, when
  `"Marginal utility of Apple"/"Price of Apple"` = `"Marginal utility of Orange"/ "Price of Orange"` = K
  `"MU"/P="MU"/P=K`
• K – Constant marginal unity of money

Table:

Units of Commodities	Apple			Orange
	Total Utility	Marginal Utility	`"MUA"/"PA"`	Total Utility	Marginal Utility	`"MU"/"P"`
1.	25	25	25/2 = 12.5	30	30	30/1 = 30
2.	45	20	20/2 = 10	41	11	11/1 = 11
3.	63	18	18/2 = 9	49	8	8/1 = 8
4.	78	15	15/2 = 7.5	54	5	5/1 = 5
5.	88	10	10/2 = 5	58	4	4/1 = 4
6.	92	4	4/2 = 2	61	3	3/1 = 3

Let us assume that the consumer wants to spend his entire income (Rs.11) on Apple add Orange. The price of an Apple and Orange is Rs. 1 each.
If the consumer wants to attain maximum utility he should buy 6 units of Apples and 5 units of Oranges so that he can get 150 units.

Here `"MUA"/"P"= "MU"/"P"`
ie. `4/1=4/1`

Diagram:

In the diagram, X-axis represents the amount of money spent and the Y-axis marginal utilities of Apple and Orange. If the consumer spends Rs. 6 on Apple and Rs. 5 on Orange, the marginal utilities of both are equal (ie) AA, = BB, Hence he gets maximum utility.