Q.Explain the law of equimarginal utility.
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Start your 14-day free trial to unlock the full solution →A consumer gets maximum satisfaction when the marginal utility per rupee is equal across all goods he buys. He keeps substituting from lower-return to higher-return goods until MU/Price is the same for every good.
Meaning: The law of equi-marginal utility (also called the law of substitution or the law of maximum satisfaction) explains how a rational consumer with a limited income and many wants should spend his money to get the greatest total satisfaction. It was developed by H. H. Gossen and popularised by Alfred Marshall.
Statement: A consumer gets maximum satisfaction when he so allocates his income among different goods that the marginal utility of the last unit of money (rupee) spent on each good is equal. Since goods have different prices, the correct condition is that the ratio of marginal utility to price is equal for all goods:
MU of good A / Price of A = MU of good B / Price of B = ... = marginal utility of money.
How the consumer reaches equilibrium (the substitution idea): Suppose the marginal utility per rupee from good A is greater than that from good B. The consumer will gain by transferring (substituting) expenditure from B to A — buying more A and less B. As he buys more A, by the law of diminishing marginal utility the MU of A falls; as he buys less B, the MU of B rises. He keeps substituting until the marginal utility per rupee is equalised across both goods. At that point no further rearrangement can raise his total satisfaction — he is in consumer's equilibrium.
Illustration (idea): If a consumer with limited money is deciding between two goods, he goes on shifting each successive rupee to whichever good yields the higher marginal utility per rupee, stopping only when the last rupee spent on each gives the same marginal utility. His total utility is then the maximum obtainable from that income.
Assumptions: utility is measurable; the consumer is rational and aims at maximum satisfaction; marginal utility of money is constant; prices and income are given; the law of diminishing marginal utility operates.
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