Consumer Expenditure and Equi-Marginal Utility

1692 Words Feb 12th, 2013 7 Pages
Consumer Expenditure and Equi-marginal Utility

Consumer behaviour theory tries to explain the relationship between price changes and consumer demand. Utility is a concept used to denote the subjective satisfaction or usefulness attained from consuming goods and services. This concept helps to explain how consumers divide their limited income / resources among different choices of goods and services that help attain them satisfaction (utility)
The issue however is how we are supposed to measure utility and how the value of utility derived from various choices can be quantified.
Because of these issues, the consumer behaviour theory has been reformulated and utility is viewed as a way to describe preferences. It was recognised that all
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He finds that apples and oranges are available. While apples cost $2 per kilogram, oranges are available for $1 per kilogram. The marginal utilities of the first three kilograms of apples are $3, $2.50 and $2 respectively and the marginal utilities of the first 3 kilograms of oranges are $2.00, $1.25 and $1 respectively. The boy would achieve maximum utility by buying 2 kilograms of apples and 2 kilograms of oranges as the marginal utility of the last kilogram of each per dollar price is 1.25. In simpler words, if Apples cost costs twice as much as Oranges, then buy Apples only when the marginal utility derived from it is at least twice as great as Oranges' marginal utility.
Indifference Curve Analysis
As we know that the consumer is able to rank bundles of goods and services based on the utility he derives from them. This makes possible joining together of all these bundles that give the consumer equal utility / satisfaction.
The curve drawn on these bundles or combinations of goods and services is known as indifference curve.
At all points across the indifference curve the consumer derives same level of utility. And thus the consumers are indifferent because they do not care which of the bundles on the indifference curve they have.

Compare the consumption bundles shown on the figure above. The indifference curve I1 tells us that Bundles A, B and C give the consumer equal satisfaction. Bundle E contains fewer bananas and fewer apples than Bundle B, and