Photo AI
Explain the concept of the Equi-Marginal Principle of Consumer Behaviour - Leaving Cert Economics - Question 2 - 2015
Question 2
Explain the concept of the Equi-Marginal Principle of Consumer Behaviour. In equilibrium, a consumer buys 5 bottles of water at €2.50 each and 8 bagels at €3 each. ... show full transcript
Worked Solution & Example Answer:Explain the concept of the Equi-Marginal Principle of Consumer Behaviour - Leaving Cert Economics - Question 2 - 2015
Step 1
Explain the concept of the Equi-Marginal Principle of Consumer Behaviour.
Answer
The Equi-Marginal Principle of Consumer Behaviour states that consumers allocate their income in such a way that the ratio of marginal utility to price is equal across all goods and services. This means that to maximize total utility, consumers will adjust their consumption until the marginal utility per euro spent on each good is equal.
In more precise terms, if a consumer is buying multiple products, the optimal consumption point occurs where:
where:
- = Marginal Utility of Water
- = Price of Water
- = Marginal Utility of Bagels
- = Price of Bagels.
This principle underlines rational consumer behavior, ensuring that funds are spent where they provide the greatest satisfaction.
Step 2
Calculate the marginal utility of the 8th bagel.
Answer
Given:
- The consumer buys 5 bottles of water at €2.50 each.
- The utility from the 5th bottle of water is 5 utils.
- The price of a bagel is €3.
Using the Equi-Marginal Principle, we know:
Substituting known values:
This simplifies to:
Multiplying both sides by 3 gives:
Therefore, the marginal utility of the 8th bagel is 6 utils.