An optimising consumer will select a consumption bundle in which the:
A)marginal rate of substitution is equal to income
B)marginal rate of substitution is equal to the relative price
C)ratio of expenditure shares equals the marginal rate of substitution
D)utility exceeds price

Question

Quizplus · Accepted Answer

An optimizing consumer will select a consumption bundle in which the marginal rate of substitution (MRS) is equal to the relative price. This ensures that the consumer is getting the most satisfaction/utility from each additional unit of both goods, given their prices. When MRS is not equal to the relative price, the consumer can always switch to a different consumption bundle that provides higher utility, and hence the current bundle is not optimal. Therefore, option B is the correct choice. The other options are not relevant to the concept of optimizing behavior.

An Optimising Consumer Will Select a Consumption Bundle in Which