The consumer chooses consumption of the two goods so that the marginal rate of substitution equals the relative price ratio.

Question

Quizplus · Accepted Answer

This statement reflects the basic principle of consumer choice theory, also known as the law of equi-marginal utility. It states that rational consumers allocate their budgets between different goods in such a way that the last unit of money spent on each good yields the same amount of marginal utility. This implies that the consumer is indifferent between two alternative consumption bundles that have the same total utility. The marginal rate of substitution (MRS) measures the rate at which the consumer is willing to exchange one good for another, while maintaining the same level of satisfaction. The relative price ratio (RPR) reflects the market exchange rate between the two goods, that is, the amount of one good that can be obtained per unit of the other good. If the consumer maximizes utility subject to the budget constraint, the MRS must equal the RPR at the optimal point. This condition ensures that the consumer is getting the most value for money and is not overspending on one good relative to the other. Therefore, the statement is true.

The Consumer Chooses Consumption of the Two Goods So That