In the Fisher two-period model, the consumer achieves his or her optimum combination of current and future consumption by selecting:
A) any combination on his or her highest indifference curve.
B) the combination on his or her highest indifference curve that is tangent to his or her budget constraint.
C) any combination on his or her budget constraint.
D) the combination on his or her budget constraint in which period-one consumption equals period-one income and period-two consumption equals period-two income.

Question

Quizplus · Accepted Answer

The Fisher two-period model assumes that the consumer has a fixed amount of income to allocate between two periods of time. The consumer's goal is to maximize utility subject to the budget constraint. The consumer achieves this goal by selecting the combination of current and future consumption on the highest indifference curve that is tangent to the budget constraint. This point of tangency represents the optimal combination of consumption for the consumer given their budget constraint and preferences. Therefore, the correct choice is B.

In the Fisher Two-Period Model, the Consumer Achieves His or Her