Q6: Explain the concept of equi marginal
utility?
must be long
Answers
Answer:
Equi-marginal principle is one of the widely used concepts in managerial economics. This principle is also known the principle of maximum satisfaction - by allocating available resource to get optimum benefit . This principle provides a basis for maximum utilization of all the inputs of a firm so as to maximize the profitability.
In the practical world, a person may purchase more then one commodity. Let us assume that a consumer purchases two goods A and B. How does a consumer spend his fixed income in purchasing two goods in order to maximize his total utility? The law of equi-marginal utility tells us the way how a person maximizes his total utility.
The equi-marginal principle can also be applied in time allocation problems such as studying for examinations. Suppose you have 3 examinations tomorrow and you only have 9 hours to study today (a usual case for students who cram during exams!). The subjects covered are Economics, English and Mathematics. Your objective is to maximize the average of your grades in these 3 subjects with your limited study time. In other words, how should you allocate your 6 hours of study time such that the marginal grade (or additional grade) from the last hour of studying spent in one subject is just equal to the marginal grade from the last hour of studying spent in any of the other subjects? If you answer, “I’ll divide my lime equally among the 3 subjects", that may not really be the most practical (or if you prefer, strategic) thing to do. Why?
Answer:
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.
Equi-marginal principle is one of the widely used concepts in managerial economics. This principle is also known the principle of maximum satisfaction - by allocating available resource to get optimum benefit . ... The law of equi-marginal utility tells us the way how a person maximizes his total utility.
The Law of equimarginal Utility is another fundamental principle of Economics. This law is also known as the Law of substitution or the Law of Maximum Satisfaction. We know that human wants are unlimited whereas the means to satisfy these wants are strictly limited.
For example, if you receive two copies of the same issue of a magazine, that extra copy has little added value. Positive marginal utility is when buying extra versions of an item is satisfying.
The price a consumer is willing to pay for a good depends on his marginal utility, which declines with each additional unit of consumption, according to the law of diminishing marginal utility. Therefore, the price decreases for a normal good when consumption increases.
Calculate MU.
Divide the difference in total utility over the difference in units. The answer you get will be the marginal utility, or the utility given by each additional unit consumed. In the example situation, you would calculate your MU as follows: $18 - $14 (example from Step 2) =$4
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