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(iii) Constant marginal utility of money: Assumes that MU of money remains constant, which is unrealistic. There is also a gradual decline in the MU of money. (iv) Change in other people’s stock: Implies that the utility of consumers is also dependent on what other people have in their stock. Thus, the utility depends on social needs.
Marginal utility is the additional utility that is added to total utility on every extra unit of consumption. Therefore, marginal utility is zero which means that on consumption of an extra unit of a commodity the additional utility is zero which keeps the total utility same and it also states that now if the consumer consumes any further unit of t he commodity it will decrease the total ...
For two-commodity case: Rupee worth of marginal utility of money should be same across good X and good Y, and equal to marginal utility of money. Reason: In case rupee worth of satisfaction (MU of good X/ price of good X) is greater for good X than good Y, the consumer will be prompted to buy more of good X and less of good Y.
He would decrease his consumption of commodity X. With this decreases, marginal utility of x rises, As a result, the ratio of marginal utility to the price of X rises. The consumer would continue decreasing the consumption of commodity X till the equality between the ratio of marginal utility to price in case of X and Y is again reached.
Explanation of the law : Initially as the consumer increases the consumption marginal utility decreases but it is positive (as in our example from first to third unit of the commodity marginal utility decreases from 6 to 2) After certain units consumer reaches to a point where utility from additional unit becomes zero or marginal utility curve intersects the X axis (as in our example at fourth ...
This increases marginal utility. However, this violates the assumption of homogeneity and continuity. 2) Miser: In the case of a miser, every additional rupee gives him more and more satisfaction. The marginal utility of money tends to increase with an increase in his stock of money. However, this situation ignores the assumption of rationality.
One key concept of consumer behavior is utility, which is the service or product provided for public use. So, let’s learn all about all the factors related to this topic. Meaning and Concept of Utility; Cardinal Utility Approach; Law of Diminishing Marginal Utility; Law of Equi-Marginal Utility; Consumer Equilibrium; Indifference Curve Analysis
The law of equi-marginal utility is an extension of the law of DMU. It states that with the limited that a person has, he aims to spend it on different commodities and earn maximum and equal satisfaction from them. He should such a combination of goods so that the utility derived from the last unit of the goods are the same.
Marginal utility refers to additional utility obtained from the consumption of an additional unit of a commodity. To illustrate, if 10th unit yields satisfaction of 100 utils, while 11th unit yields satisfaction of 105 utils, then marginal utility derived from the 11 th unit is 5 utils.
Law of Diminishing Marginal Utility (DMU) states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing. People spend their income on various goods because consuming more and more of anyone good reduces the marginal satisfaction obtained from further consumption of the same good.