In a budget line/indifference curve diagram, at the consumer equilibrium
A) any movement upward or downward on the budget line will move the consumer to a less preferred point.
B) any movement to the northeast to higher indifference curves moves the consumer to a less preferred point.
C) the slope of the budget line is as much larger as possible than the marginal rate of substitution.
D) All of the above statements are correct.

Question

Quizplus · Accepted Answer

At the consumer equilibrium, the consumer has maximized utility subject to the budget constraint. Any movement upward or downward on the budget line implies a decrease in his purchasing power and therefore will move the consumer to a less preferred point. Any movement to the northeast to higher indifference curves would indicate that the consumer is consuming more goods and hence would be preferable, not less preferred. The slope of the budget line cannot be larger than the marginal rate of substitution as that would imply that the consumer is not optimizing his utility. Therefore, only statement A is correct.

In a Budget Line/indifference Curve Diagram, at the Consumer Equilibrium