Question

Explain utility maximization rule with an example.

Explain utility maximization rule with an example.

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Answer 1

UTILITY MAXIMIZATION RULE ;

• A consumer maximizes his total utility (TU) or satisfaction when he spends his money income in such a way that he receives equal marginal utility from the last dollar spent on each good.
• Utility maximization in a two commodity case ( when the consconsumers only two goods say X and Y );.   

( Marginal utility from good X/ P_x) = ( Marginal utility from good Y/P_Y)

Symbolically ; ( MU_X/P_X)=(MU_Y/ P_Y )

Example — Let the consumer uses only two goods, price of good X be P_{​​​​x}=$ 5 and price of good Y, P_Y= $10 . MU of both the goods fall as per the law of diminishing marginal utility.

UTILITY SCHEDULE

Q	MUX	PX	MUY	PY	MUX/PX	MUY/PY
1	100	5	160	10	20	16
2	80	5	150	10	16	15
3	60	5	120	10	12	12
4	50	5	110	10	10	11

Thus the consumer maximizes his total utility when he uses 3 unit of good X and 3 unit of good Y , Here the ratio of MU of both the goods to their respective prices are equal.