question_answer

Explain the law of diminishing marginal utility with the help of a total utility schedule.

Or

Explain the condition of consumer's equilibrium with the help of utility analysis.

Answer:

Law of Diminishing Marginal Utility states that as a consumer consumes more and more units of a commodity at succession, then the Marginal Utility derived from the consumption of each additional unit of the commodity falls.
Units of Commodity	Total Utility (TU)	Marginal Utility (MU) \[MU={{T}_{n}}-T{{U}_{n-1}}\]
1	80	\[(800)=80\]
2	160	\[(16080)=80\]
3	220	\[(220160)=60\]
4	270	\[(270220)=50\]
5	310	\[(310270)=40\]
6	340	\[(340310)=30\]
From the above schedule, it can be observed that for two unit of consumption, marginal utility is 80. For the third unit, the marginal utility falls to 60. For the fourth unit, the marginal utility further falls to 50 and so on. Thus, as more and more units of a commodity are consumed, the marginal utility derived from the consumption of each additional unit falls.
Or
Consumer's equilibrium will be attained at a point where marginal utility of a commodity is equal to its price. However, MU is expressed in terms of utils and price is expressed in money form. Therefore, equality of MU in utils and price cannot be the basis of consumer's equilibrium. Hence, marginal utility also needs to be expressed in money form.
Marginal utility in money form can be obtained by dividing it (MU) by marginal utility of one rupee. Marginal utility of 1 is the extra utility when an additional rupee is spent on other available goods in general. Suppose that for an additional rupee we get two units of some other commodity, then marginal utility of rupee is 2 (utils). Knowing marginal utility (MU) of a commodity and marginal utility of a rupee, we can find out marginal utility of a commodity in money terms in the following way:
Marginal Utility in Money terms = \[\frac{\text{Marginal}\,\,\text{Utility}\,\,\text{(in}\,\,\text{utils)}}{\text{Marginal}\,\,\text{Utility}\,\,\text{of}\,\,\text{Rs}\,\,\text{1}}\]