Page 41 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes In this mode of distribution of income the consumer by spending 4 one mango gets 36 (12 + 10 + 8 + 6)
units and by spending only 1 on milk the consumer will get 10 units of utility. If the consumer spends
his earning in this manner then he will able to get total utility of 36 + 10 = 46 units.
Fig. 3.4

Y Y
M.U. of Milk
M.U. of Mangoes Equi-Marginal
12 12
Utility
10 10
8 8
Utility 6 Utility 6

4 4
2 2
0 X 0 X
12 3 456 12 34 5 6

(A) Expenditure (Rupees) on Mangoes (B) Expenditure (Rupees) on Milk

This total utility is less by 2 units as compared to the total utility (48) derived from the previous
distribution of income. Thus other distributions of income will yield the consumer as much satisfaction
as the one in which the last unit of rupees spent on different commodities gives equal marginal utility.
In the Fig. 3.4(A) and 3.4(B) units of rupees are shown in OX-axis and Marginal Utility in the
OY-axis. In Fig. 3.4(A) the marginal utilty of the mangoes is shown while in Fig. 3.4(B) the marginal
utility of the milk is shown. The figure indicates that if the income of the consumer is 5 then he spent
3 on mangoes and 2 on Milk as the third rupee he spends on the mangoes and the second rupee he
spends on the Milk gave him the equal marginal utility i.e 8 units. Dotted line in the figure represents
equal marginal utility derived from the last unit of rupee spend on the two commodities –mangoes
and milk. By distributing his income on these two commodities in this manner the consumer gets total
utility of 48 units. It is the maximum total utility that the consumer is getting out of his expenditure of
5. And this manner of spending has given the consumer a sense of total satisfaction.
If the consumer spends his income on these two commodities mango and milk in other manner then his
total utility will be less than the maximum. The below Fig. 3.5 explains the same.

Fig. 3.5

Y Y
12 M.U. of Mangoes 12 M.U. of Milk
10 10 E
A F
8 8
Utility 6 B Utility 6
4
4
2 Gain 2 Loss
0 C D X 0 G H X
12 34 56 12 34 56
Expenditure (Rupees) on Mangoes Expenditure (Rupees) on Milk

34 LOVELY PROFESSIONAL UNIVERSITY