Explain law of equi marginal utility with the help of suitable example
Answers
This law is based on the principle of obtaining maximum satisfaction from a limited income. It explains the behavior of a consumer when he consumes more than one commodity.
The law states that a consumer should spend his limited income on different commodities in such a way that the last rupee spent on each commodity yield him equal marginal utility in order to get maximum satisfaction.
Suppose there are different commodities like A, B, …, N. A consumer will get the maximum satisfaction in the case of equilibrium i.e.,
MUA / PA = MUB / PB = … = MUN / PN
Where MU’s are the marginal utilities for the commodities and P’s are the prices of the commodities.
Assumptions of the Law
There is no change in the price of the goods or services.
The consumer has a fixed income.
The marginal utility of money is constant.
A consumer has perfect knowledge of utility.
Consumer tries to have maximum satisfaction.
The utility is measurable in cardinal terms.
There are substitutes for goods.
A consumer has many wants.
Limitation of the Law
There are some limitations to this law.
The law is not applicable in case of knowledge. Reading books provides more knowledge and has more utility.
This law is not applicable in case of fashion and customs.
This law is not applicable for very low income.
There is no measurement of utility.
Not all consumer care for variety.
The law fails when there are no choices available for the good.
The law fails in case of frequent price change.
Importance of the Law
This law is helpful in the field of production. A producer has limited resources and tries to get maximum profit.
This law is helpful in the field of exchange. The exchange is of anything like some goods, wealth, trade, import, and export.
It is applicable to public finance.
The law is useful for workers in allocating the time between the work and rest.
It is useful in case of saving and spending.
It is useful to look for substitution in case of price rise.
Solved Example for You
Question: Choose the correct alternative.
The marginal utility curve is …..
Horizontal
Vertical
Upward Sloping
Downward Sloping
Solution: 4. Downward Sloping