Tag: utility and law of diminishing marginal utility

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Multiple choice business economics and quantitative methods consumer's behaviour consumer equilibrium laws in economics utility and law of diminishing marginal utility

_______ states that consumer distributes his expenditure between different goods in such a way that the marginal utility derived from the last rupee spent on each good is the same.

  1. The law of demand

  2. The law of diminishing marginal rate of substitution

  3. The law of diminishing marginal utility

  4. The law of equi-marginal utility
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The law of equi-marginal utility 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.

 A rational consumer substitutes some units of the commodity of greater utility to some units of the commodity of less utility. The result of this substitution will be that the marginal utility of the former (commodity with greater utility) will fall and that of the latter will rise, till the two marginal utilities are equalized.

Multiple choice business economics and quantitative methods consumer's behaviour consumer equilibrium laws in economics utility and law of diminishing marginal utility

Consumer is said to be in equilibrium, maximizing his total utility, when

  1. the marginal utilities of the two goods consumed are equal.

  2. the proportions of the marginal utilities and respective prices are equal.

  3. the consumer gets full satisfaction from the consumption.

  4. the consumer feels satisfied with his expenditure on the various goods.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

According to the law of equi-marginal utility, a consumer is said to be in equilibrium when the ratio of the marginal utilities of the two commodities and their respective prices are equal. This means that the MU of the last rupee spent on each commodity is the same.

The equation it should satisfy is: MUX /PX = MUY/PY

Multiple choice business economics and quantitative methods consumer's behaviour consumer equilibrium laws in economics utility and law of diminishing marginal utility

Law of equilibrium marginal utility was propounded by _______.

  1. Marshall

  2. Gossen

  3. Lipsey

  4. Keynes
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Hermann Heinrich Gossen was a Prussian economist who propounded the law of equilibrium marginal utility.
The law of equilibrium marginal utility states that the consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee spend on each good is equal. In other words, consumer is in equilibrium position when marginal utility of  money expenditure on each goods is the same.

Multiple choice business economics and quantitative methods consumer's behaviour consumer equilibrium laws in economics utility and law of diminishing marginal utility

The law of equi-marginal utility can be presented symbolically as ________.

  1. ${ M{ U } _{ a } }/{ { P } _{ a } }={ M{ U } _{ b } }/{ { P } _{ b } }={ M{ U } _{ c } }/{ { P } _{ c } }=..........={ M{ U } _{ n } }/{ { P } _{ n } }$
  2. ${ M{ U } _{ a } }/{ { P } _{ a } }<{ M{ U } _{ b } }/{ { P } _{ b } }<{ M{ U } _{ c } }/{ { P } _{ c } }<..........<{ M{ U } _{ n } }/{ { P } _{ n } }$
  3. ${ M{ U } _{ a } }/{ { P } _{ a } }>{ M{ U } _{ b } }/{ { P } _{ b } }>{ M{ U } _{ c } }/{ { P } _{ c } }>..........>{ M{ U } _{ n } }/{ { P } _{ n } }$

  4. none of the above
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation
A consumer is in equilibrium position when marginal utility of money expenditure on each goods is the same. This situation holds the law of equi-marginal utility true. For example: if a consumer consumes oranges and apples, then the marginal utility derived from the last rupee spent on either apples or orange will be same.
In this above mentioned formula, 'a' is one good and 'b' is another, but the marginal utility what a consumer derives from each good is same, which is equal to the marginal utility of money.
Multiple choice business economics and quantitative methods consumer's behaviour consumer equilibrium laws in economics utility and law of diminishing marginal utility

Which of the following can be treated as limitation of the law of equi-marginal utility?

  1. Assumption of rationality is not practicable.

  2. Consumers ignorance is a potent factor that always results in other than equilibrium position.

  3. The assumption that the goods on which the consumer spends his money are perfectly divisible, i.e., goods can be bought even in extremely small quantities does not hold true at times.

  4. All of above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

In real life, consumers do not act rationally while measuring the utility of the product which they are purchasing. Consumers ignore to compare the price and utility of different commodities, due to which they cannot make a rational decision. Moreover, the law of equi-marginal utility does not hold good in case of indivisible goods because comparison is not possible.

Multiple choice business economics and quantitative methods consumer's behaviour consumer equilibrium laws in economics utility and law of diminishing marginal utility

___________ law is unrealistic in nature.

  1. Law of DMU

  2. Law of equi-marginal utility

  3. Both a & b

  4. None of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

In real life situation, Law of equal marginal utility is very unrealistic because it is very irrational on the part of the consumer to measure his satisfaction in cardinal number to find the utility he is deriving from a product and then comparing it to the price of the product.

Multiple choice business economics and quantitative methods consumer's behaviour consumer equilibrium laws in economics utility and law of diminishing marginal utility

As per the law of equal marginal utility consumer considers __________.

  1. prices

  2. marginal utilities

  3. availability of goods

  4. Both a & b
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

In equal marginal utility case the consumer tries to match the utility which he is getting from a standard unit of a commodity with the price that is prevalent in the market with other factors remaining constant to achieve equilibrium.

Multiple choice business economics and quantitative methods consumer's behaviour consumer equilibrium laws in economics utility and law of diminishing marginal utility

When price of both the commodities is same, the consumer attains maximum satisfaction where ________.

  1. $\displaystyle \frac{MU _X}{MU _Y} > \frac{P _X}{P _Y}$
  2. $\displaystyle \frac{MU _X}{P _X} < \frac{MU _Y}{P _Y}$
  3. $\displaystyle \frac{MU _X}{P _X} > \frac{MU _Y}{P _Y}$
  4. $MU _X = MU _Y$
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

When consumer consumes two commodities and their prices are the same, then equilibrium is achieved when consumer equates marginal utility derived from one commodity with the marginal utility derived from another commodity.