Q.State the Law of Equi-Marginal Utility. Give its formula and explain the process by which a consumer reaches equilibrium under this law.
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Start your 14-day free trial to unlock the full solution →The Law of Equi-Marginal Utility, also called Gossen's Second Law or the Law of Substitution, states that a consumer with a fixed money income, facing given prices for two or more goods, maximises total utility by allocating that income such that the marginal utility of the last rupee spent on every good is the same: MU_x/P_x = MU_y/P_y = ... = MU_m.
Process of reaching equilibrium: suppose initially MU_x/P_x is greater than MU_y/P_y — the last rupee spent on X buys more satisfaction than the last rupee spent on Y. A rational consumer therefore shifts spending away from Y towards X. As more X is bought, its marginal utility falls (Law of Diminishing Marginal Utility); as less Y is bought, its marginal utility rises. The consumer continues this substitution — more X, less Y — until the two ratios become equal. At that point, shifting a rupee either way would lower rather than raise total utility, so the consumer has reached equilibrium and total utility i …
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