If the combination of two goods occurs at a point of tangency between the budget line and an indifference curve, then:
A)consumer equilibrium has not been achieved.
B)all available income has been spent and total utility is maximized.
C)total utility can be increased by consuming less of both goods.D.total utility can be decreased by consuming more of both goods.

Question

Quizplus · Accepted Answer

At the point of tangency between the budget line and an indifference curve, the marginal rate of substitution equals the ratio of prices of the two goods, which is optimal for the consumer. This means that the consumer has maximized total utility given their budget constraint, and hence all available income has been spent. Therefore, option B is the correct answer. Option A is incorrect since consumer equilibrium has been achieved at the point of tangency. Options C and D are incorrect since consuming less of both goods or more of both goods will move the consumer away from the point of tangency and decrease total utility.

If the Combination of Two Goods Occurs at a Point