The ratio of the prices of the two goods is equal to the ratio of the marginal utilities of the two goods at:
A)the vertical intercept of the budget line.
B)the optimal consumption bundle.
C)the horizontal intercept of the budget line.
D)the intersection of the budget line with the highest indifference curve.

Question

Quizplus · Accepted Answer

The optimal consumption bundle is where the consumer is maximizing their utility given their budget constraint. At this point, the ratio of the marginal utilities of the two goods is equal to the price ratio. This is because at this point, the consumer is willing to trade off one good for another at the exact rate given by the price ratio. At any other point, the consumer could increase their utility by adjusting their consumption of the two goods, but the ratio of marginal utilities would not necessarily equal the price ratio.

The Ratio of the Prices of the Two Goods Is