As a consumer, would you equate price of a commodity with total utility or marginal utility? Give reason in support of your answer.
Open in App
Solution
A consumer would equate price (P) of the commodity with its marginal utility(MU), not total utility (TU). Reason:
The consumer, while buying a unit of a commodity, compares additional
benefit and additional cost related to that unit. Additional benefit is
MU, while additional cost is price of the commodity. He will buy a
particular unit only when MU is at least equal to price. And, he strikes
his equilibrium when MU (in terms of money) = Price.
The
consumer does not compare price with TU. Because , TU is the sum total
of utility resulting from all the units of a commodity he is buying. It
cannot be compared with price which is always related to one unit (or is
always expressed as 'per unit').