What are the assumptions of law of equi-marginal utility?
Assumptions of the Law of Equi-Marginal Utility Consumer’s income is given (limited resources). The law operates based on the law of diminishing marginal utility. The consumer is a rational economic individual. This means that the consumer wants to gain maximum satisfaction with limited resources.
What does law of equi-marginal utility states?
The law states that a consumer should spend his limited income on different commodities in such a way that the last rupee spent on each commodity yield him equal marginal utility in order to get maximum satisfaction. …
What happens to marginal utility when price increases?
The increase in the price of good 1 to $3 lowers the marginal utility per dollar spent on good 1 relative to the case where the price of good 1 was $2.
What is not the assumption of law of diminishing marginal utility?
Substitution of goods is not an assumption under law of DMU, because if one good substitutes for another then law of DMU will not remain applicable.
What is the Equi-marginal principle?
The equimarginal principle states that consumers will choose a combination of goods to maximise their total utility. This will occur where. The consumer will consider both the marginal utility MU of goods and the price.
What are the four assumptions about utility maximization?
In economics, utility theory governs individual decision making. The student must understand an intuitive explanation for the assumptions: completeness, monotonicity, mix-is-better, and rationality (also called transitivity).
What are the assumptions of utility?
Which of the following is the assumption of Law of DMU?
The Law of DMU assumed that there is no time gap between consumption of units i.e. there is continuity in consumption. The units should be consumed back to back. If there is a time gap in consumption, the MU will not diminish.
What is the law of diminishing marginal utility and equi marginal utility?
The equi-marginal principle is based on the law of diminishing marginal utility. The equi-marginal principle states that a consumer will be maximizing his total utility when he allocates his fixed money income in such a way that the utility derived from the last unit of money spent on each good is equal.
What are the assumptions of the law of equi marginal utility?
Law of Equi-Marginal Utility 1 Assumptions of the Law. There is no change in the price of the goods or services. The consumer has a fixed income. 2 Limitation of the Law. There are some limitations to this law. The law is not applicable in case of knowledge. 3 Importance of the Law. This law is helpful in the field of production.
How does the law of diminishing marginal utility apply to money?
The law operates based on the law of diminishing marginal utility. The consumer is a rational economic individual. This means that the consumer wants to gain maximum satisfaction with limited resources. The marginal utility of money is constant.
Why is the marginal utility of money not constant?
Firstly, the utility derived from commodities is not measurable in cardinal numbers. Secondly, the marginal utility of money cannot be constant. As the money you possess depletes, the marginal utility of money increases. Thirdly, even a rational economic individual does not allocate his or her income according to the law.
Why is it called the law of equi-marginal returns?
It is also described as the Law Of economy of expenditure as it analyses the expenditure behavior of the consumer whose aim is to save his money. Since the marginal returns derived by a consumer from different commodities is equal, it is called as the Law of Equi-Marginal Returns.