What economic principle does the following equation demonstrate? Explain what each of the components of the equation stands for and how it demonstrates the economic principle you identified
MU1/P1 = MU2/P2 = … MUN/PN
What will be an ideal response?
The equation is used for consumer equilibrium. The principle of consumer equilibrium states that to achieve a state of equilibrium, the ratio of marginal utility to the price of goods purchased must be equal for all goods. In the equation, MU stands for marginal utility and P stands for price. The subscripts 1, 2, and N stand for hypothetical goods. The ellipses represent that the equation applies to all goods, from 1 and 2 all the way up to the last good (N). The equals signs represent that the result of dividing marginal utility by price is the same for all goods, which meets the condition for equilibrium.
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