Question: Why it is wrong to say utility is maximized when marginal utilities of all goods are exactly equal?

correct the statement and explain. Answer: Utility is only considered as maximized when the last dollar spent on each goods is equal. or we can say when the marginal utility of the last dollar spent on each good is exactly the same as the marginal utility of the last dollar spent on any other good . Economists assume that consumers allocate their limited incomes so as to obtain the greatest satisfaction or utility. To maximize utility, a consumer must satisfy the equimarginal principle that the marginal utilities of the last dollar spent on each and every good must be equal. Only when the marginal utility per dollar is equal for apples, bacon, coffee, and everything else will the consumer attain the greatest satisfaction from a limited dollar income. But the marginal utility of a $50-per-ounce bottle of perfume is not equal to the marginal utility of a 50-cent glass of cola. Rather, their marginal utilities divided by price per unit are all equal in the consumer's optimal allocation. That is, their marginal utilities per last dollar, MU/P, are equalized. Equal marginal utility or benefit per unit of resource is a fundamental rule of choice. Take any scarce resource, such as time. If you want to

maximize the value or utility of that resource, make sure that the marginal benefit per unit of the resource is equalized in all uses. Let us assume there are only three commodities available in the market, A, B and C. Also assume that Tom has a daily income of only $15 to spend and that he can exactly order his utility preference for each of the three products. Product A costs $1 per unit, Product B costs $3 per unit and Product C costs $5. Note that diminishing marginal utility sets in immediately for each of the three products. Marginal utility information is described on per $ basis, because a consumers choice are influenced not only by the amount of additional utility that successive units give him but also how many dollars he give up to get them. Let us consider each dollar spent. Marginal utility per dollar shows that one dollar spend on Product A provides the highest satisfaction of 20 utils as opposed to only 12 and 8 utils from products B and C, respectively. Second dollar spends again buys the highest utility of 15 utils. However, when Tom spends the third dollar, a switch to Product B promises 15 utils of added satisfaction as opposed to 11 utils from Product A. Following the principle, the best combination Tom can purchase with $15 would be 4 units of A, 2 units of B and 1 unit of C. The total utility generated would be 154 utils. $4 spent on A give 54

utils of satisfaction; $6 spent on Product B gives 60 utils and $5 spent on C gives 40 utils. This gives a total of 154 utils. No other combination will result in as high utility as this with an expenditure of $15.

The results from the table above can be generalised to n commodities and the following condition should hold in equilibrium:

So utility can not be maximized or this equation cannot be hold if

MU1=MU2=MU3.

Therefore,from the above discussion we can say that marginal utilities per dollar of all goods are exactly equal.