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State the condition for equilibrium under cardinal approach.

State the condition for equilibrium under cardinal approach.

Solution

Under the cardinal approach, the consumer is in equilibrium when total satisfaction is maximised from a given income spent on two or more goods, and the conditions are:

  1. Necessary (equi-marginal) condition: the marginal utility per rupee must be equal across all goods, i.e. MUx / Px = MUy / Py = MUm, the marginal utility of money (the law of equi-marginal utility).
  2. Sufficient condition: the marginal utility of each good must be diminishing at the equilibrium point, so that spending is truly at its best balance.

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