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The equi-marginal principle states, that a rational decision maker would allocate or hire his resources in such a way that the ratio of marginal returns and marginal costs of various uses of a given resource is the same, in a given use. For example, a consumer maximizes utility or satisfaction from consumption of successive units of goods X, Y, and Z will allocate his consumption budget such that
MUx/Px = MUy/Py = MUz/Pz
where MU represents marginal utility and P the price of the good. Similarly, a producer seeking maximum profit will use the technique of production which would ensure that
MRP1 / MC1 = MRP2/MC2 = MRPn/MCn
where MRP is the marginal revenue product of inputs and MC shows marginal cost.
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