At the point where the budget line is just touching an indifference curve at one point,
A) the slope of the budget line is equal to the slope of the indifference curve.
B) the marginal rate of substitution equals the relative price.
C) the consumer can change his or her consumption and can move to a higher indifference curve.
D) Both answers A and B are correct.
E) Both answers B and C are correct.

Question

Quizplus · Accepted Answer

When the budget line is just touching an indifference curve at one point, it means that the consumer is allocating their income in the most efficient way possible. This implies that the slope of the budget line (which represents the relative price of the two goods) is equal to the slope of the indifference curve (which represents the consumer's marginal rate of substitution). At this point, the consumer is also in equilibrium, meaning that they are maximizing their utility given their budget constraint. However, this does not mean that the consumer cannot change their consumption and move to a higher indifference curve if their income or the prices of the goods change.

At the Point Where the Budget Line Is Just Touching