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1. (a) Explain the economic concept of the Equi-Marginal Principle of consumer behaviour - Leaving Cert Economics - Question 1 - 2019
Question 1
1. (a) Explain the economic concept of the Equi-Marginal Principle of consumer behaviour. (b) In equilibrium, a consumer buys 6 apples at €0.90 each and 7 oranges a... show full transcript
Worked Solution & Example Answer:1. (a) Explain the economic concept of the Equi-Marginal Principle of consumer behaviour - Leaving Cert Economics - Question 1 - 2019
Step 1
Explain the economic concept of the Equi-Marginal Principle of consumer behaviour.
Answer
The Equi-Marginal Principle is a fundamental concept in consumer theory which asserts that consumers will allocate their limited income among various goods in such a manner that the ratio of marginal utility to price remains the same across all goods. This principle suggests that consumers strive to maximize their total utility by equating the marginal utility per unit of currency spent on each good.
When consumers achieve this state of balance, they derive maximum satisfaction from their expenditures. In mathematical terms, if a consumer is choosing between two goods A and B, then the consumer maximizes their utility when:
where and are the marginal utilities of goods A and B, and and are their respective prices. This indicates that as long as the utility per last euro spent is not equal, consumers can increase their total satisfaction by reallocating their budget.
Step 2
Calculate the marginal utility of the 7th orange.
Answer
Given the price of apples () and oranges (), and the marginal utility of the 6th apple ( utils), we apply the Equi-Marginal Principle.
Using the formula:
Substituting the known values:
Calculating, we get:
Thus, the marginal utility of the 7th orange is 5 utils.