A consumer chooses an optimal consumption point where the
slope of the indifference curve exceeds the slope of the budget constraint.
marginal rate of substitution equals the relative price ratio.
ratios of all the marginal utilities are equal.
All of the above are correct.
The Correct Answer and Explanation is :
The correct answer is B: marginal rate of substitution equals the relative price ratio.
Explanation:
In microeconomic theory, consumers are assumed to make choices that maximize their utility, subject to their budget constraint. This is the foundation of consumer theory, which helps us understand how individuals allocate their income among various goods and services to achieve the highest possible satisfaction (utility). The key concept that comes into play here is the optimal consumption point where a consumer chooses the combination of goods that maximizes their utility given their budget.
- Indifference Curve and Budget Constraint:
- The indifference curve represents all combinations of two goods that provide the consumer with the same level of utility. The slope of the indifference curve is called the marginal rate of substitution (MRS), which tells us how much of one good the consumer is willing to give up to get an additional unit of another good while keeping utility constant.
- The budget constraint shows all the combinations of two goods that the consumer can afford given their income and the prices of the goods. The slope of the budget constraint is determined by the relative prices of the goods, i.e., the price ratio of the two goods.
- Optimal Consumption Point:
- The optimal consumption point occurs when the consumer’s marginal rate of substitution (MRS) between the two goods equals the relative price ratio of those goods. This means that at the optimal point, the consumer is willing to trade off one good for another at the same rate at which the market allows them to do so (through prices).
- Mathematically, this is represented as:
[
\text{MRS} = \frac{P_x}{P_y}
]
where (P_x) and (P_y) are the prices of goods X and Y, respectively.
- The Other Options:
- A (slope of the indifference curve exceeds the slope of the budget constraint) is not correct because if the MRS is greater than the price ratio, it would imply that the consumer could improve their utility by consuming more of one good.
- C (ratios of all marginal utilities are equal) is also not correct because optimal consumption requires the marginal rate of substitution to equal the price ratio, not the equality of all marginal utilities.
Thus, the correct condition for the optimal consumption point is when the marginal rate of substitution equals the relative price ratio.