Explanation of the law:
Assume that there are two goods X and Y on which a consumer has to expend a specified income. The consumer being rational, he will attempt to spend his inadequate income on goods X and Y to maximize his total utility or fulfillment. Only at that point the consumer will be in symmetry.
According to the law of equi-marginal utility, the consumer will be in balance at the point where the utility derived from last income spent on each is equivalent.
Representatively the consumer will be in equilibrium if,
MUx/Px = MUy/Py = MUmHere,
MUx = Marginal utility of commodity XMUy = Marginal utility of commodity Y Px = Price of commodity XPy = Price of commodity YMUm = Marginal utility of money.MUx/Px and MUy/Py are termed as marginal utility of money expenditure. They elucidate the marginal utility of one rupee used up on commodity X and the marginal utility of one rupee used up on commodity Y.
Let us exemplify the law of equi marginal utility with the help of the table shown below:
Table: Marginal utility of Goods X and Y
Table: Marginal utility of money expenditure
Assume that the marginal utility of money is steady at $ 1 = 5 units, then the consumer will purchase 6 units of commodity ‘x’ and 5 units of commodity ‘y’. His net expenditure will be ($ 5 x 6) + ($ 4 x 5) = $ 50/- on both commodities. At this position of expenditure his satisfaction is maximized and hence he will be in balance.
Figure: Consumer’s Equilibrium
Consumer’s equilibrium is graphically illustrated in figure shown above as marginal utility curves of goods slope down, curves depicting MUx/Px and MUy/Py will also slope downward. Taking the income of a consumer as specified, let his marginal utility of money be steady at OM utils in figure shown above. MUx/Px is equivalent to OM (i.e., the marginal utility of money) whenever OH amount of good x is bought; MUy/Py is equivalent to OM whenever OK quantity of good Y is purchased. Therefore, when the consumer is purchasing OH of X and OK of Y, then,
MUx/Px = MUy/Py = MUm
Thus, the consumer will be in equilibrium whenever he purchases OH of X and OK of Y. No other allotment of money expenditure wills outcome greater utility than whenever he buys OH of X and OK of Y. Assume that the money income of the consumer falls. Then the new marginal utility of money will be equivalent to OM; then the consumer will raise the purchases of good X and Y to OH and OK correspondingly.
Latest technology based Economics Online Tutoring Assistance
Tutors, at the www.tutorsglobe.com, take pledge to provide full satisfaction and assurance in Theory of Consumer Behavior help via online tutoring. Students are getting 100% satisfaction by online tutors across the globe. Here you can get homework help for Theory of Consumer Behavior, project ideas and tutorials. We provide email based Theory of Consumer Behavior help. You can join us to ask queries 24x7 with live, experienced and qualified online tutors specialized in Theory of Consumer Behavior. Through Online Tutoring, you would be able to complete your homework or assignments at your home. Tutors at the TutorsGlobe are committed to provide the best quality online tutoring assistance for Economics Homework help and assignment help services. They use their experience, as they have solved thousands of Economics assignments, which may help you to solve your complex issues of Theory of Consumer Behavior. TutorsGlobe assure for the best quality compliance to your homework. Compromise with quality is not in our dictionary. If we feel that we are not able to provide the homework help as per the deadline or given instruction by the student, we refund the money of the student without any delay.
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!