Example and Explanation of Law of Equi-Marginal Utility

Example and Explanation of Law of Equi-Marginal Utility

The doctrine of equi-marginal utility can be explained by taking an example. Suppose a person has Tk. 5 with him whom he wishes to spend on two commodities, tea and cigarettes. The marginal utility derived from both these commodities is as under.

Schedule:

Units of money	MU of Tea	MU of Cigarettes
1 2 3 4 5	10 8 6 4 2	12 10 8 6 3
Tk.5.	Total Utility=30	Total Utility=39

 

A rational consumer would like to get maximum satisfaction from Tk.5.00. He can spend money in three ways:

i) Tk.5 may spent on tea only.

ii) Tk.5 may be utilize for the purchase of cigarettes only.

iii) Some Taka may be spent on the purchase of tea and some on the purchase of cigarettes.

If the prudent consumer spends TK on the purchase of tea, he gets 30 utility. If he spends TK. % on the purchase of cigarettes, the total utility derided is 39 which are higher than tea. In order to make the best of the best of the limited resources, he adjusts his expenditure.

(i)      By the spending TK.4 on tea and TK. 1 on cigarettes, he gets 40 utility (10+8+6+4+12=40).

(ii)     By the spending TK.3 on tea and TK. 2 on cigarettes, he derives  46 utility (10+8+6+10+12=46).

(iii)    By the spending TK.2 on tea and TK. 3 on cigarettes, he gets 48 utility (10+8+12+10+8=48).

(iv)    By the spending TK.1 on tea and TK. 4 on cigarettes, he gets 46 utility (10+12+10+8+6=46).

The prudent consumer will spend TK.2 on tea and TK.3 on cigarettes and will get maximum satisfaction. When he spends TK.2 on tea and TK.3 on cigarette, the marginal utilities derived from both these commodity is equalizes, the total utility is then maximum, I, e., 48 clear from the schedule given above.