Page 40 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-3: Consumer Theory–Cardinal Utility Analysis

MU MU MU Notes
_____ 1 = _____ 2 = _____ 3

P
P
P
1
3
2
If prices of the commodities are equal, the maximum satisfaction to the consumer can be indicated in
the following equation.
MU = MU = MU
1 2 3
In the above equation MU = MU = MU refers to the marginal utility of the first, second and third
1
2
3
commodity and P , P , P refer to the price of the first, second and third commodity.
1 2 3
Assumptions
Law of Equi-Marginal Utility is based on the following assumptions—
(1) Utility can be measured in the Cardinal number system.
(2) Consumer is rational that is he wants maximum satisfaction from his income.
(3) There is no change in the income of consumer.
(4) Marginal Utility of money remains constant.
(5) There is no change in the price of commodity and its substitutes.
(6) Every unit of the commodity being used is of same quality and size.
(7) Law of diminish marginal utility is applicable here.
Explanation
The law can be explained with the help of the Table 3 and Fig. 3.4. Assume that an income of a person is
5.00 only. He wants to spend on two commodities say mango and milk. Also assume that the price of
these two commodities is 1 per Kilo/Litre. The marginal utilities of different unities of mangoes and
milk are shown in below Table 3.
Table 3: Law of Equi-Marginal Utility
Rupee Spent M.U. of Mangoes M.U. of Milk
First 12 10
Second 10 8
Third 8 6
Fourth 6 4
Fifth 4 2

Assume that the consumer spends his income in terms of one–rupee unit. The first rupee spent on mangoes
yields him 12 units worth of marginal utility and the first rupee spent on milk yields him 10 units worth of
marginal utility. Hence he will spend first rupee on mangoes. Out of 2nd and 3rd rupee he will spend one in
mangoes and milk. Thus to get the total satisfaction the consumer will spend 3 on mangoes and 2 on milk
out of his total income. Third rupees spend on mangoes yield him 8 units while 2nd rupee spend on milk will
yield him 8 units worth of marginal utility. Thus the last units of money spend on both the commodities give
the consumer the equal marginal utility. This mode of distribution would yield the consumer the maximum
satisfaction. Utilities from mangoes are 30 units (12 + 10 + 8) utility from milk is 18 (10 + 8). The total utility is
48 (30 + 18). If the consumer spends his income in other manner, then he will get less total utility.
Assume that the consumer spends 4 i.e one rupee more on mangoes and 1 less in milk. By spending 1
more in mangoes the consumer will get 6 units of the utility while spending 1 less in milk. The consumer
will loss 8 units of the utility.

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