Exhibit 10-3 Refer to Exhibit 10-3.Which of the following statements is(are)true?
A) The point of tangency between the budget line and the indifference curve indicates the optimal quantities of each good that will maximize total satisfaction.
B) At the point of tangency, the slope of the indifference curve will equal the slope of the budget line.
C) Consumer optimization occurs at the point where the marginal rate of substitution is equal to the relative price of the two goods.
D) All of the above are true.

Question

Exhibit 10-3  Refer to Exhibit 10-3.Which of the following statements is(are)true?
A) The point of tangency between the budget line and the indifference curve indicates the optimal quantities of each good that will maximize total satisfaction. 
B) At the point of tangency, the slope of the indifference curve will equal the slope of the budget line. 
C) Consumer optimization occurs at the point where the marginal rate of substitution is equal to the relative price of the two goods. 
D) All of the above are true.

Quizplus · Accepted Answer

All of the above statements are true. The point of tangency between the budget line and the indifference curve represents the optimal consumption bundle that maximizes total satisfaction. At this point, the slope of the indifference curve (the marginal rate of substitution) will equal the slope of the budget line (the relative price of the two goods). Therefore, consumer optimization occurs at the point where the marginal rate of substitution is equal to the relative price of the two goods.