Consumer is said to be in equilibrium, maximizing his total utility, when
the proportions of the marginal utilities and respective prices are equal.
Under the cardinal utility approach, a consumer with a given income and given prices maximises total utility by following the law of equi-marginal utility.
Equilibrium is reached when the marginal utility per rupee is the same for every good: \( \dfrac{MU_x}{P_x} = \dfrac{MU_y}{P_y} = MU_m \). If one good gave more utility per rupee, shifting spending towards it would raise total utility.
Equal marginal utilities of the two goods give equilibrium only in the special case of equal prices. Full satisfaction (zero marginal utility) is the point of satiety, which a consumer with a limited income does not reach, and a vague feeling of being satisfied with spending is not an economic condition.
Hence, the proportions of the marginal utilities and respective prices are equal.
Similar Questions
The Marshallian utility analysis is based on a less valid assumption of :
At a point of satiety for a commodity the marginal utility is
Important Questions from Utility analysis
Utility derived from consumption of an additional unit of a good is called
Which of the following statements is true?
The word ‘marginal’ means _____.
The law of diminishing marginal utility was propagated by:
- Ordinal utility analysis of the consumer's behaviour is considered superior to the cardinal utility analysis mainly due to
