Question

A consumer consumes goods X and Y. Given below is his marginal utility schedule for goods X and Y. Suppose, the price of X is Rs 2, Y is Rs 1 and income Rs 12. State the law of Equimarginal utility and explain how the consumer will attain equilibrium.

Uints	1	2	3	4	5	6
MUx	16	14	12	10	8	6
MUy	11	10	9	8	7	6

Answer 1

It is worth noting that in order to maximise his utility the consumer will equate marginal utilities of the goods because the prices of the two goods are different. He will equate the marginal utility of the last rupee (i.e., the marginal utility of money expenditure) spent on these two goods. In other words he will equate \(\frac {MU_x}{P_x}\) With \(\frac {MU_y}{P_x}\) while spending his given money income on the two goods. By looking at the table, it will become clear that \(\frac {MU_x}{P_x}\) equal to 8 units when the consumer purchases 1 unit of good X and \(\frac{MU_y}{P_y}\) is equal to 8 units when he buys 4 units of good Y. Therefore, a consumer will be in equilibrium when he is buying 1 unit of good X and 4 units of good Y and will be spending (Rs 2 × 4 + Rs 1 × 4) = Rs 12 on them. Thus, in the equilibrium position where he maximises his utility.

Thus, the marginal utility of the last rupee spent on each of the two goods he purchases is the same, that is 8 utils.