At the consumer's optimum point, the marginal rate of substitution of apples for oranges is equal to the ratio of the price of oranges to the price of apples.

Question

Quizplus · Accepted Answer

This statement is known as the "equimarginal principle" and is a fundamental concept in consumer theory. It states that at the point of consumer equilibrium, the consumer will allocate their income so that the last dollar spent on each good will yield the same level of utility. This can be understood through the equation MUa/Pa = MUb/Pb, where MUa is the marginal utility of apples, Pa is the price of apples, MUb is the marginal utility of oranges, and Pb is the price of oranges. We can rearrange this equation to get MUa/MUb = Pb/Pa, which represents the marginal rate of substitution of apples for oranges being equal to the ratio of the prices.

At the Consumer's Optimum Point, the Marginal Rate of Substitution