Explanation
Intersection of market demand and supply determines both equilibrium price and equilibrium quantity. Hence, option D is correct.
The Equi-Marginal Utility theory states that consumers will maximise total utility from their incomes by consuming that combination of goods where:
$$\dfrac{MU_a}{MU_b} =$$ $$\dfrac{P_a}{P_b}$$
For example, suppose bread = Re.1 and Rice = Rs.2.
Law of diminishing marginal utility is based on psychological law that as more and more units of a commodity is consumed, marginal utility derived from every successive unit will decline in respect to all goods with a few exception.
When the commodity consumed by a customer increases it is the normal psychological affect that the satisfaction which that commodity is providing to the customer will decrease. Therefore, for every extra unit of consumption of a commodity, marginal utility derived will decrease.
This condition for a consumer to maximize utility is usually written in the following form:
MUX/PX = MUY/PY
1. Cardinal measurement of utility: It is assumed that utility can be measured and a consumer can express his satisfaction in quantitative terms such as 1, 2, 3, etc.
2. Monetary measurement of utility: It is assumed that utility is measurable in monetary terms.
3. Consumption of reasonable quantity: It is assumed that a reasonable quantity of the commodity is consumed. For example, we should compare MU of glassfuls of water and not of spoonful’s. If a thirsty person is given water in a spoon, then every additional spoon will yield him more utility. So, to hold the law true, suitable and proper quantity of the commodity should be consumed.
4. Continuous consumption: It is assumed that consumption is a continuous process. For example, if one ice-cream is consumed in the morning and another in the evening, then the second ice-cream may provide equal or higher satisfaction as compared to the first one.
5. No change in Quality: Quality of the commodity consumed is assumed to be uniform. A second cup of ice-cream with nuts and toppings may give more satisfaction than the first one, if the first ice-cream was without nuts or toppings.Hence, correct answer is option D.
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