When a consumer's marginal rate of substitution between X and Y is equal to the ratio of prices for X and Y,and when the consumer is spending all available income,then
A)the budget line is tangent to an indifference curve.
B)the consumer is not maximizing his utility.
C)a higher indifference curve can be reached given the existing budget line.
D)the budget line is tangent to the indifference curve at all quantities of X and Y.
E)all budget lines are tangent to all indifference curves.

Question

Quizplus · Accepted Answer

When a consumer's marginal rate of substitution between X and Y is equal to the ratio of prices for X and Y, it means that the consumer is allocating his/her spending in such a way that the marginal utility per dollar spent is equal for both goods. This condition is also known as consumer equilibrium, and it requires that the budget line be tangent to an indifference curve. Therefore, choice A is the correct answer. Choices B, C, D, and E are incorrect because they do not reflect this condition of consumer equilibrium.

When a Consumer's Marginal Rate of Substitution Between X and Y