If consumers buy only gasoline and food, at their best affordable choice the marginal rate of substitution between food and gasoline ________ the relative price of food and gasoline.
A) must exceed
B) must be less than the
C) must equal
D) might exceed or be less than but not equal to

Question

Quizplus · Accepted Answer

When consumers only buy gasoline and food, their budget constraint can be represented by a straight line in a two-dimensional graph, with food on the horizontal axis and gasoline on the vertical axis. The slope of this line represents the relative price of food and gasoline, which is their opportunity cost of choosing one over the other. The marginal rate of substitution (MRS) between food and gasoline represents the rate at which the consumer is willing to give up one good to get more of the other, which is the slope of the indifference curve at the point where the budget constraint is tangent to it. At the best affordable choice, which is the point where the budget constraint and the highest indifference curve they can reach intersect, the slope of the budget constraint (i.e. the relative price) must be equal to the slope of the indifference curve (i.e. the MRS). Therefore, the answer is C.

If Consumers Buy Only Gasoline and Food, at Their Best