When the consumer is at his or her best affordable consumption point, it is the case that the marginal rate of substitution is

Question

Quizplus · Accepted Answer

At the best affordable consumption point, the consumer has optimized the trade-off between the two goods and achieved the highest level of satisfaction given their budget constraint. This occurs when the marginal rate of substitution (MRS) between the two goods equals the price ratio (PR). If MRS > PR, the consumer could increase satisfaction by trading more of one good for the other until MRS = PR. If MRS < PR, the consumer could increase satisfaction by trading less of one good for the other until MRS = PR. Therefore, at the best affordable consumption point, MRS = PR.

When the Consumer Is at His or Her Best Affordable