Table1.3 : Marginal Utility of Money Expenditure
Suppose a consumer has money income of Rs. 24 to spend on the two goods. It is worth noting that in order to maximise his utility the consumer will not equate marginal utilities of the goods because prices of the two goods are different. He will equate the marginal utility of the last rupee (i.e. marginal utility of money expenditure) spent on these two goods. In other words, he will equate MU x / P x with MU y / P y while spending his given money income on the two goods. By looking at the Table 7.3 it will become clear that MU x / P x is equal to 5 utils when the consumer purchases 6 units of good X and MU y / P y is equal to 5 utils when he buys 4 units of good Y. Therefore, consumer will be in equilibrium when he is buying 6 units of good X and 4 units of good 7and will be spending (Rs. 2 x 6 + Rs. 3 x 4 ) = Rs. 24 on them that are equal to consumer’s given income. Thus, in the equilibrium position where the consumer maximises his utility. MU x / P x = MU y / P y = MU m 10/2 = 15/3 =5 Thus, marginal utility of the last rupee spent on each of the two goods he purchases is the same, that is, 5 utils. Consumers’ equilibrium is graphically portrayed in Fig. 1.2. Since marginal utility curves of goods slope downward, curves depicting and MU x / P x and MU y / P y also slope downward. Thus, when the consumer is buying OH of X and OK of Y, then MU x / P x = MU y / P y = MU m Figure 1.2: Equi-Marginal Utility Principle and Consumer’s Equilibrium
Therefore, the consumer is in equilibrium when he is buying 6 units of X and 4 units of Y. No other allocation of money expenditure will yield him greater utility than when he is buying 6 units of commodity X and 4 units of commodity Y. Suppose the consumer buys one unit less of good X and one unit more of good Y. This will lead to the decrease in his total utility. It will be observed from Figure 1.2 (a) that the consumption of 5 units instead of 6 units of commodity X means a loss in satisfaction equal to the shaded area ABCH and from Fig. 7.2(b) it will be seen that consumption of 5 units of commodity Y instead of 4 units will mean gain in utility equal to the shaded area KEFL. It will be noticed that with this rearrangement of purchases of the two goods, the loss in utility ABCH exceeds gain in utility KEFL. Thus, his total satisfaction will fall as a result of this rearrangement of purchases. Therefore, when the consumer is making purchases by spending his given income in such a way that MU x / P x = MU y / P y , he will not like to make any further changes in the basket of goods and will therefore be in equilibrium situation by maximizing his utility. Limitations of the Law of Equi-Marginal Utility Like other laws of economics, law of equi-marginal utility is also subject to various limitations.
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- Fall '19