Which of the following statements is true about a consumer's optimal decision when indifference curves are concave?
A) Both goods are consumed.
B) No goods are consumed.
C) Only one of the goods is consumed.
D) It occurs at the point of tangency with the budget line.

Question

Quizplus · Accepted Answer

When indifference curves are concave, they exhibit diminishing marginal rate of substitution. This means that the consumer is willing to give up less and less of one good for an additional unit of the other good as consumption of that good increases. This behavior results in the consumer consuming only one of the goods at the point where the budget line is tangent to the highest attainable indifference curve. Therefore, the optimal decision is to consume only one of the goods.

Which of the Following Statements Is True About a Consumer's