“The law of equi marginal utility states that maximum level of total utility can only be achieved if a consumer divides its expenditure on each good in such a way that the marginal utility of the last unit of money spent on each good remains equal".
Explanation with the help of Table:
Note: one unit of money = 100
Suppose consumer has 5 units of money and he/she spent on two goods ghee and oil. The first unit of money spent on ghee has marginal utility = 24, and at the use of second unit of money marginal utility decreases to 20. At the end using all of the five units, total utility is 80. Similarly five units spent on oil, its total utility is 60. But if a consumer wants to purchase both of ghee and oil, then he/she will spend 3 units on ghee and 2 units on oil. Because of this arrangement the MU of both goods will be equal to 16 = 16
Total utility from ghee = 24+20+16 = 60
Total utility from oil = 20+16 = 36
Aggregate utility of both goods = 96
So the total utility is 96 which are higher than the total utilities of ghee and oil either which are 80 and 60 respectively.
Enlisted below points are taken as assumptions for the law to be held true:
- Consumer is supposed to be rational.
- Utility can be measured numerically.
- There is a decrease in MU at the consumption of each additional good.
- Total utility derived from all goods is additive.
- Utility of one good must not hamper the utility of other good.
- Goods must be divisible so that consumer can utilize them according to his will.
Limitations of the law:
- There is no possibility for utility to be measured in cardinal numbers.
- Ignorance of a consumer can affect the maximization of utility.
- Publicity of good causes the consumer to purchase such good even through it is expensive.
- All goods are not divisible so consumer cannot get equal marginal utility.
Personal interest in a specific good also makes this law just theoretical.