key term - Law of Equimarginal Utility

Definition

The law of equimarginal utility states that a consumer will allocate their limited budget across different goods in a way that maximizes their total utility. This is achieved when the marginal utility per dollar spent is equal across all goods consumed.

5 Must Know Facts For Your Next Test

1. The law of equimarginal utility helps consumers make optimal consumption choices given their budget constraint.
2. Consumers will continue to allocate their spending until the marginal utility per dollar is equal across all goods consumed.
3. Violating the law of equimarginal utility would result in the consumer being able to increase their total utility by reallocating their spending.
4. The law of equimarginal utility assumes that consumers have diminishing marginal utility for each good.
5. Applying the law of equimarginal utility allows consumers to reach their highest possible indifference curve given their budget constraint.

Review Questions

• Explain how the law of equimarginal utility helps consumers make optimal consumption choices.
  • The law of equimarginal utility states that consumers will allocate their limited budget across different goods in a way that maximizes their total utility. This is achieved when the marginal utility per dollar spent is equal across all goods consumed. By following this principle, consumers can ensure they are getting the maximum satisfaction from their spending, given their budget constraint.
• Describe the relationship between the law of equimarginal utility and the concept of diminishing marginal utility.
  • The law of equimarginal utility relies on the assumption that consumers experience diminishing marginal utility for each good they consume. As a consumer purchases more of a good, the additional satisfaction they get from each additional unit decreases. This diminishing marginal utility is what drives consumers to allocate their spending across multiple goods to achieve the highest total utility possible given their budget constraint.
• Analyze how a violation of the law of equimarginal utility would impact a consumer's ability to maximize their utility.
  • If a consumer violates the law of equimarginal utility by allocating their spending unevenly across goods, such that the marginal utility per dollar is not equal, they would be able to increase their total utility by reallocating their spending. This is because they would be able to get more total utility by shifting some of their spending from the good with a lower marginal utility per dollar to the good with a higher marginal utility per dollar, until the law of equimarginal utility is satisfied. Violating this principle would prevent the consumer from reaching their highest possible indifference curve given their budget constraint.

Related terms

Marginal Utility:

The additional utility or satisfaction gained from consuming one more unit of a good or service.

Budget Constraint:

The limit on the total amount of money a consumer can spend on goods and services.

Utility Maximization:

The process of a consumer allocating their budget to achieve the highest possible total utility.