Q.Explain the Law of Equi-Marginal Utility.

A consumer attains maximum satisfaction when the ratio of marginal utility to price is equal for every good — the Law of Equi-Marginal Utility.

This 8-mark item is a central law of consumer behaviour in CHSE Odisha +2 Business Economics (the syllabus aligns with the NCERT/CBSE curriculum).

Meaning. A consumer has limited income but many wants. He will spend his income on various goods in such a way that the last rupee spent on each good yields him the same marginal utility. Only then is his total satisfaction greatest; if the satisfaction from a rupee differed across goods, he could gain by shifting spending from the lower-yielding to the higher-yielding good. Because the consumer keeps substituting, the law is also called the Law of Substitution or the Law of Maximum Satisfaction.

Statement. Other things being equal, a consumer is in equilibrium (gets maximum satisfaction) when the marginal utilities of the goods he buys are proportional to their prices — i.e. the marginal utility of money spent is equal in all uses:

• Marginal utility of X ÷ Price of X = Marginal utility of Y ÷ Price of Y = ... = Marginal utility of money.

Assumptions.

1. Utility is measurable in cardinal units (utils).
2. The consumer is rational and aims at maximum satisfaction.
3. Income and prices of goods are given and constant.
4. Marginal utility of money remains constant.
5. The law of diminishing marginal utility operates.

Explanation with a numerical illustration. Suppose a consumer has 5 rupees to spend on two goods X and Y, each priced at Rs. 1. The marginal utility schedule (in utils) is:

To maximise satisfaction he picks the highest marginal utilities in turn: 20 (X), 16 (X), 16 (Y), 12 (X), 12 (Y) — spending 3 rupees on X and 2 on Y. At this allocation the marginal utility of the last rupee is equal (12 = 12), total utility (20+16+12 from X and 16+12 from Y = 76) is the maximum obtainable. Any other split (say 4 on X, 1 on Y) gives less total utility.

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