Law of Equi-Marginal Returns

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The Law of Equi-Marginal returns states that a rational consumer will spend his/her income so that the ratio of marginal utility to the price will be the same for all goods consumed.

It uses the following formula:

$\frac{MU1}{P1} = \frac{MU2}{P1} = \frac{MU3}{P3}$

In this formula, MU1 means the marginal utility of good 1, and P1 is the price of good 1. What it means is that most people will find a balance between what gives them the most satisfaction (utility) and the prices of all the things they would like to buy.

It is related to the Law of Diminishing Marginal Utility.

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