At the optimal consumption bundle,the marginal rate of substitution of leisure for consumption is equal to
A) the real wage and the budget line is tangent to an indifference curve.
B) minus the real wage and the budget line is tangent to the indifference curve.
C) the real wage and the budget line intersects the indifference curve..
D) minus the real wage and the budget line intersects the indifference curve.
E) the real wage and on the highest possible indifference curve.

Question

Quizplus · Accepted Answer

At the optimal consumption bundle, the marginal rate of substitution (MRS) of leisure for consumption should be equal to the real wage. This is because the MRS represents the willingness of an individual to give up one unit of consumption for an additional unit of leisure, and the real wage represents the opportunity cost of leisure (i.e. the amount of consumption that an individual must forgo to obtain one additional unit of leisure). So, when the MRS equals the real wage, the individual is indifferent between giving up one unit of consumption for the opportunity to obtain one additional unit of leisure and continuing with the current consumption and leisure levels. The optimal consumption bundle is the one where the budget line is tangent to an indifference curve, which indicates that the individual is spending all their income to reach the highest possible utility level.

At the Optimal Consumption Bundle,the Marginal Rate of Substitution of Leisure