Answer to Question #233870 in Microeconomics for Mozo

Question

Derive the equal marginal principle. What dose it state? can you generalize the principal? Show it for n commodities wher n = 1,2,....n

Answer 1

Equi- Marginal Principle is known as the Principle of Maximum Satisfaction. It describes how person uses the available resources in order to attain maximum utility. 

The Equi marginal principle states that a consumer would be in a position of maximizing his/ her total utility when :

The fixed money income is allocated in such a way that the utility derived from the money spent on last unit of each commodity is same.

The consumer decides to choose combinations of different commodities in such a way that the total utility is maximized.

This principle can generalized as:

Marginal Utility of commodity 1 ÷Price of commodity 1= Marginal Utility of commodity 2÷Price of commodity 2= ...................Marginal Utility of commodity n÷Price of commodity n = Marginal Utility of Money = Constant.

So, the consumer chooses that combination of commodities where the ratios of Marginal Utility to Price of the commodity is same for all the commodities. The consumer has to however, keep in mind the given budget constraint i.e.

$P_1 × Q_1 + P_2 × Q_2 + .....P_n × Q_n ≤ M$

where P is the price of commodities, Q is the quantity demanded and M is the fixed money income.