A consumer satisfies the condition ________ when her indifference curve is just tangent to her budget constraint.
A) MUx = MUy
B) TUx = TUy
C) MUx/Px = MUy/Py
D) TUx/Px = TUy/Py

Question

Quizplus · Accepted Answer

This condition is known as the marginal rate of substitution (MRS) being equal to the price ratio. At the point where the indifference curve is tangent to the budget constraint, the consumer is maximizing her utility given her budget constraint. This means that the consumer is willing to give up exactly the amount of one good (as measured by the MRS) that she needs to in order to purchase an additional unit of the other good, which is exactly the ratio of the prices of the two goods. Therefore, the correct condition is MUx/Px = MUy/Py.

A Consumer Satisfies the Condition ________ When Her Indifference Curve