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.

Question

Quizplus · Accepted Answer

At the optimal consumption bundle, the marginal rate of substitution (MRS) of leisure for consumption is equal to the real wage. This is because the MRS measures how much of one good (leisure) a consumer is willing to give up in exchange for one more unit of the other good (consumption). If the real wage is higher, the opportunity cost of leisure is higher, so the consumer is willing to give up more leisure time for an additional unit of consumption. If the real wage is lower, the opportunity cost of leisure is lower, so the consumer is willing to give up less leisure time for an additional unit of consumption. The budget line is tangent to an indifference curve at the optimal bundle because this represents the point where the consumer is maximizing utility subject to the budget constraint. At any other point, the consumer could either have more utility (by moving to a higher indifference curve) or a higher level of consumption/leisure (by moving along the budget line).

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