At the best affordable point,
A) the marginal rate of substitution reaches its minimum value.
B) relative prices reach their minimum value.
C) the marginal rate of substitution equals the relative price.
D) the marginal rate of substitution equals real income.
E) the marginal rate of substitution reaches its maximum value.

Question

Quizplus · Accepted Answer

At the best affordable point, the consumer is maximizing utility subject to the budget constraint. This means that the marginal rate of substitution (MRS) must equal the relative price (the ratio of the prices of the two goods being consumed). If the MRS were higher than the relative price, the consumer would be willing to substitute more of the cheaper good for the more expensive one, thus reducing costs and increasing utility. If the MRS were lower than the relative price, the consumer would be better off substituting less of the cheaper good for the more expensive one, thus increasing utility. Therefore, at the best affordable point, the MRS must equal the relative price.

At the Best Affordable Point