Consumers allocate their resources based on the ______?

Analyze the question: The question asks which principle guides how consumers allocate their limited income (resources) among the goods and services they want.

Explain the concept: Consumers want to get the most satisfaction (utility) from their limited income. Each extra unit of a good gives less additional satisfaction than the one before it. This is the law of diminishing marginal utility. Because of it, a rational consumer spreads spending across different goods until the marginal utility per naira spent is equal for every good (the equi-marginal principle). This is how consumers decide how much of each good to buy.

Check each option:

• A. Law of diminishing marginal utility: This is the basis of consumer choice and allocation of income. It fits the question.
• B. Value in use and value in exchange: This explains the meaning of value and price. It does not guide how a consumer spreads spending.
• C. Law of returns to scale: This is a producer concept. It describes how output changes when all inputs are increased, so it does not apply to consumers.
• D. Diamond and water paradox: This explains why water, which is very useful, is cheap while diamonds, which are less useful, are expensive. It is an illustration of value, not a rule for allocating resources.

Answer: The correct option is A, the law of diminishing marginal utility.

Exam tip: In Economics, link the concepts to the right "actor":

• Consumer behavior → utility, diminishing marginal utility, indifference curves
• Producer behavior → returns to scale, law of variable proportions

If the question mentions consumers, think utility first.