Question

Question 5.

Explain the concept of consumer equilibrium in terms of the Equi-marginal principle. Provide appropriate graph for explaining you answer

Answer 1

Equi-marginal principle states that when a consumer will distribute his income between two goods in such a way that the last dollar spent on each good is equal. Or, he will get equal satisfaction from consumption of both the goods. Equimarginal utility is calculated by dividing the marginl utility by the price of that good (MU/ $), and consuming that quntity of goods where MU/ $ is same for both. The consumer is in equilibrium when MUx / Px = MUy / Py, where MU is the marginal utility derived from the consumption of the good and P is the price of the good.

Equi-marginal utility can be illustrated with the following graph:

  

X axis represents the number of units of goods X and Y consumed; and y axis represents the margunal utility per dollar for each commodity. With the given budget, the consumer will consume X and Y in such a way that MU/$ is the same.

In the graph, we see that the consumer derives same utility when he consumes 5 units of good Y and 8 units of good X. MUx/ Px = MUy / Py = 12.