Rohan is maximizing utility subject to his limited income. As a result, which of the following statements is TRUE? A) The slope of the indifference curve is twice the slope of the budget constraint. B) The indifference curve intersects the budget constraint at precisely two points. C) The budget constraint is tangent to the indifference curve. D) The MRS_XY = P_XP_Y.

Question

Quizplus · Accepted Answer

The point of tangency between the budget constraint and an indifference curve represents the combination of goods that maximizes utility given the consumer's budget. This is because at the tangency point, the slope of the indifference curve (which represents the rate at which the consumer is willing to substitute one good for another) equals the slope of the budget constraint (which represents the rate at which the market allows the consumer to substitute one good for another).

Rohan Is Maximizing Utility Subject to His Limited Income