If a consumer consumes two goods,X and Y,and has indifference curves that are bowed inward,the consumer's optional choice occurs when
A) he consumes that maximum affordable quantity of good X.
B) he consumes that maximum affordable quantity of good Y.
C) his indifference curve is tangent to his budget constraint.
D) his indifference curve lies entirely above his budget constraint.

Question

Quizplus · Accepted Answer

When the indifference curve is bowed inward, it indicates decreasing marginal rate of substitution. In other words, the marginal utility of each good decreases as more of it is consumed. As a result, the consumer will choose a combination of X and Y where the ratio of marginal utilities is equal to the ratio of prices (the budget constraint). This occurs where the indifference curve is tangent to the budget constraint. Therefore, the optimal choice occurs at point C where the budget constraint is tangent to the highest possible indifference curve.

If a Consumer Consumes Two Goods,X and Y,and Has Indifference