The way in which a rational consumer allocate his expenditure on goods is described by:

Question

Accepted Answer

The correct option is 3:

The way a rational consumer allocates their limited expenditure across different goods to maximize total satisfaction is fundamentally described by the principle of utility maximization, which is built upon the Law of Diminishing Marginal Utility (LDMU). The LDMU states that as a consumer acquires more units of a specific good, the satisfaction (utility) derived from each successive unit decreases. A rational consumer aims for the point of equilibrium where the marginal utility received from the last unit of money spent on every good is equal. In essence, they distribute their income so that they get the most satisfaction for their money, stopping consumption of any single good when its marginal utility falls below what they could gain by spending that money elsewhere. The core concept governing expenditure allocation, particularly when discussing a single commodity, is the continuous decline in additional satisfaction.

The incorrect option is 1: The law of Demand
The Law of Demand describes the inverse relationship between the price of a good and the quantity demanded (when price rises, demand falls, and vice versa). It describes market behavior in response to price changes, not the internal mental process of allocating a budget across different goods based on satisfaction.

The incorrect option is 2: The law of Supply
The Law of Supply describes the direct relationship between the price of a good and the quantity producers are willing to supply. This concept relates to producer behavior, costs, and market output, and is entirely irrelevant to how a consumer makes expenditure decisions.

The incorrect option is 4: Consumer Surplus
Consumer Surplus is the monetary measure of the benefit consumers receive from a good—specifically, the difference between the maximum price a consumer is willing to pay and the actual price paid. While it relates to utility, it is an outcome measure of market transaction benefit, not the mechanism or rule governing the decision to allocate expenditure.