Business Economics -I (B.Com) 1st Sem Previous Year Solved Question Paper 2022

The Law of Equi-Marginal Utility, also known as the Law of Maximum Satisfaction, is an important principle in economics that helps individuals make rational consumption decisions. It can be explained as follows:

1. Definition: The Law of Equi-Marginal Utility states that a rational consumer will distribute their income or resources among various goods and services in such a way that the marginal utility (additional satisfaction) obtained from the last unit of money spent on each good is equal.

2. Equalizing Marginal Utility: To maximize their overall satisfaction, a consumer will continue reallocating their spending until the marginal utility per unit of money (MU/P, where MU is marginal utility and P is the price) is the same for all goods. In other words, they will spend more on a good as long as the marginal utility per dollar spent is higher for that good than for others.

3. Optimizing Resource Allocation: This principle helps consumers allocate their limited resources efficiently. By equalizing the marginal utility across goods, they ensure that they are getting the most satisfaction (utility) from their spending, given their budget constraints.

4. Example: Suppose a person has $100 to spend on two goods, pizza and ice cream. If the marginal utility of the last slice of pizza (MU) is greater than the last scoop of ice cream (MU), the person will allocate more money to pizza until the two marginal utilities are equal. This balance ensures 
that they derive the most satisfaction from their budget.

5. Limitations: While the Law of Equi-Marginal Utility provides a useful framework for understanding consumer behaviour, it assumes that individuals have perfect information, consistent preferences, and the ability to make precise calculations. In reality, consumer choices may be influenced by other factors like advertising, habits, and psychological biases.

Conclusion : The Law of Equi-Marginal Utility helps consumers make rational choices by allocating their resources in a way that maximizes overall satisfaction, ensuring that the marginal utility per dollar spent is the same for all goods or services they purchase.