The law of diminishing marginal utility plays a crucial role in explaining the demand behavior of a typical consumer and determination of his equilibrium when he is facing the following circumstances.

(i) The consumer is allowed to buy all or some out of specified goods, say A, B, C.D….N.

(ii) Each good obeys the law of DMU, and the its marginal utility schedule is known.

(iii) Each good has a fixed price for the consumer. It does not vary with the quantity purchased by the consumer.


(iv) The amount of expenditure to be incurred by the consumer is given. However, the consumer need not spend the same amount on each good, and their quantities can differ.

The solution of this problem, it describes the respective particular good does not satisfy this condition, then its successive units should be transferred from those for whom it has smaller marginal utility to those for whom it has higher marginal utility. For example, marginal utility of a ‘basic necessity’ like nutritious food is expected to be higher for a poor family than for a rich one which has already enough of it. Therefore, if through rationing, taxes, subsidies, or other methods, some of it is transferred from richer families to the poorer ones, total utility of the society as a whole is expected to increase.