A consumer's utility-maximising combination of goods is given by the bundle that corresponds to the point on
A)the indifference curve that intersects the horizontal axis.
B)the indifference curve that intersects the vertical axis.
C)an indifference curve that is tangent to the budget constraint.
D)the budget constraint where it intersects one of the axes.

Question

Quizplus · Accepted Answer

The utility-maximising combination of goods will be the point on the indifference curve that is tangent to the budget constraint. This is because at this point, the marginal rate of substitution between the two goods is equal to the relative price of the two goods. Therefore, the consumer cannot increase their utility by purchasing more of one good and less of the other without violating the budget constraint. The points on the indifference curve that intersect the horizontal or vertical axis or the budget constraint where it intersects one of the axes do not necessarily correspond to the utility-maximising combination of goods.

A Consumer's Utility-Maximising Combination of Goods Is Given by the Bundle