7.1.3—Equi-marginal principle

The equi-marginal principle says a consumer allocates spending so that the marginal utility gained from the last unit of money is equal across goods: MUx/Px = MUy/Py, subject to the budget.

If one good gives more utility per dollar, shifting a small amount of spending toward it raises total utility until the ratios equalise or a corner solution is reached.

If the next unit of tea gives 18 utils at $3 (6 utils per dollar) and fruit gives 8 utils at$2 (4 utils per dollar), the consumer should shift spending toward tea before claiming the bundle is optimal.

The rule compares marginal utility per price, not total utility or marginal utility alone, and it assumes the prices and preferences used in the calculation are relevant.