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IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features

A consumer in neoclassical theory buys two goods, X and Y, and maximises utility. Which condition holds at the optimum?

At the utility-maximising bundle, the marginal utility per rupee spent is equal across the goods. If it were not, the consumer could raise total utility by moving spending to the good giving more extra utility per rupee, until the ratios equalise.

  1. ATotal utility from X equals total utility from Y
  2. BThe prices of X and Y are equal
  3. CMarginal utility per rupee spent is equal across X and YCorrect
  4. DMarginal utility of X is zero
  5. The consumer spends equal amounts on each good

Explanation

The equi-marginal principle states that utility is maximised when MU/price is the same for every good bought. If MU per rupee differed, the consumer could gain by shifting spending towards the good with the higher ratio. Equal totals, equal prices or equal spending are not required.

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