2.
Utility can be measured in cardinal number
3.
Marginal utility of money remains constant. (Whatever the level of consumers’ income, each unit of money has utility
equal to 1).
4.
Income of the consumer remains constant.
5.
Diminishing marginal utility
Let us suppose that the money income of the consumer is Rs. 18 which he spends on two goods X and Y. Let the per unit price
of X and Y be Rs.2 and Rs 3, respectively. Now the equilibrium position is explained in the following table;
The above table shows that the consumer reaches equilibrium when he purchases 3 units of X and 4 units of Y. Here the
marginal utility of both X and Y are equal i.e. 8 utils. The total utility of 3 units of X would be 12+10+8= 30 utils and 4
units of Y would be 14+12+10+8 = 44 utils which gives total utility equals to 74 (=30+44) utils. This total utility represents
maximum utility derived by the consumer out of his expenditure of Rs. 18. If the consumer spends his income on X and Y in
any other manner, his/her total utility will be less than the maximum. This can be explained with help of figure below:
1
1
6
3
2
2
3
2
2
5
5
4
4
4
4
6
6
8
8
10
10
12
12
14
0
0
6
P
N
E2
E1
L
M
Y
Y
X
X
Q
R
Gain in utility
Loss in utility
Units
MU
x
MU
y
MUx
Px
MUy
Py
1
2
3
4
5
6
24
20
16
12
8
4
42
36
30
24
18
12
12
10
8
6
4
2
14
12
10
8
6
4

The figure shows that consumer reaches equilibrium by purchasing 3 units of X and 4 units of Y because the marginal
utilities of money spent on these goods are equal(E
1
N=E
2
R) to each other. In this situation the consumer gets maximum
satisfaction or utility. Any other combinations will give less total satisfaction. Suppose a consumer buys one unit more of
X and consequently one unit less of Y, this will lead to decrease in total utility. It is evident from the above figure that by
purchasing one unit more of X the gain will be equal to LMNE
1
and by purchasing one unit less of Y the loss will be equal
to PQRE
2
. In this case, the gain in utility(LMNE
1
) is less than the loss of utility(PQRE
2
). Thus, only 3 units of X and 4

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- Fall '19
- Supply And Demand, Utility, MUy, Law of equi-marginal utility