Weighted Marginal Utility

Weighted marginal utility is a key principle guiding rational consumer choice under conditions of economic scarcity. Given a limited income Y, a rational consumer seeks to satisfy as many needs as possible. To maximize total utility, the consumer prioritizes their economic wants and allocates their income so that each euro spent delivers the same marginal utility across all goods - this is known as the principle of equal marginal utility. In practical terms, the marginal utility derived from the last euro spent on good A should be equal to that of the last euro spent on good B. When choosing among n goods with a fixed income Y, satisfaction is maximized when the consumer allocates their budget in a way that the quantity consumed of each good yields the same marginal utility.

The equal marginal utility rule applies when all goods are priced equally. In such a case, the consumer’s task is simply to decide how much of each good to consume (q), ensuring that the final unit consumed of each good delivers the same marginal utility (MU). However, in real-world markets, goods typically have different prices (P). This makes it necessary to adjust marginal utility by the price of each good - a concept known as weighted marginal utility.

When goods vary in price, rational consumer choice is achieved by equalizing the weighted marginal utility across all goods - that is, the marginal utility per unit of currency spent. This is the principle of equal weighted marginal utility. In summary, weighted marginal utility represents the benefit derived from the last unit of a good relative to its price.