Figure: Harold's Indifference Curves The figure shows three of Harold's indifference curves for bread and cheese. (Figure: Harold's Indifference Curves) Look at the figure Harold's Indifference Curves.If the price of bread is $2 per loaf, the price of cheese is $2, and Harold has $10 to spend on bread and cheese, what is Harold's optimal consumption bundle of bread and cheese?

Question

Figure: Harold's Indifference Curves The figure shows three of Harold's indifference curves for bread and cheese.  (Figure: Harold's Indifference Curves) Look at the figure Harold's Indifference Curves.If the price of bread is $2 per loaf, the price of cheese is $2, and Harold has $10 to spend on bread and cheese, what is Harold's optimal consumption bundle of bread and cheese?

Quizplus · Accepted Answer

Harold's optimal consumption bundle is where his budget line is tangent to his highest attainable indifference curve. At a price of $2 for bread and cheese, and a budget of $10, he can buy 5 loaves of bread and 5 pounds of cheese (or any combination that uses up his entire budget). 
However, the optimal bundle occurs where his highest indifference curve is tangent to the budget line. This occurs at point A in the figure, where Harold consumes 3 loaves of bread and 2 pounds of cheese. This bundle gives him the highest level of utility given his budget and the prices of bread and cheese.

Figure: Harold's Indifference Curves the Figure Shows Three of Harold's