Answer:
Given the price of a good a consumer decides how many units of the good to buy based on the marginal utility derived from the good and the marginal utility of money for him. A consumer purchases those many units of good where the marginal utility of a rupee spent on the good becomes equal to the marginal utility of money. That is where, Marginal Utility of a Rupee spent on the commodity = Marginal Utility of Money Marginal Utility of rupee spent on the commodity refers to the utility derived from each additional unit of the rupee spent on the purchase of the good. Algebraically, Marginal Utility of Rupee = \[\frac{M{{U}_{x}}}{{{P}_{x}}}\] Marginal Utility of money refers to the valuation of a unit of a rupee for a consumer. It is assumed to constant. Thus, the consumer purchases those many units of the good where, \[\frac{M{{U}_{x}}}{{{P}_{x}}}=M{{U}_{m}}\] However, if the marginal utility of the rupee spent on the commodity is greater than the marginal utility of money, \[\left( \text{that}\,\,\text{is,}\,\,\text{if}\,\,\frac{M{{U}_{x}}}{{{P}_{x}}}>M{{U}_{m}} \right)\] then, the consumer would continue to consume more and more units of the good until the equality is again reached. On the other hand, if the marginal utility of the rupee spent on the good is less than the marginal utility of money, \[\left( \text{that}\,\,\text{is,}\,\,\text{if}\,\,\frac{M{{U}_{x}}}{{{P}_{x}}}<M{{U}_{m}} \right)\]then, the consumer would reduce the consumption of the good until marginal utility becomes equal to the price paid by him.
You need to login to perform this action.
You will be redirected in
3 sec
