Law of Equi-Marginal Utility (Law of Substitution)

A consumer rarely spends income on just one good. 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 FIXED income allocates it across two or more goods so as to obtain the maximum possible total satisfaction: a consumer maximises total utility by distributing a given income among goods such that the marginal utility per rupee spent on the last unit of every good is equal — and, simultaneously, the whole income is spent. For two goods X and Y, priced $P_x$ and $P_y$, the equilibrium condition is:

$\dfrac{MU_x}{P_x} = \dfrac{MU_y}{P_y}$ …