A consumer chooses an optimal consumption point where the
a. ratios of all the marginal utilities are equal.
b. marginal rate of substitution equals the relative price ratio.
c. All of the above are correct.
d. slope of the indifference curve exceeds the slope of the budget constraint.
The Correct Answer and Explanation is :
The correct answer is:
c. All of the above are correct.
Explanation:
Consumers aim to reach an optimal consumption point where they achieve the most satisfaction (utility) given their budget constraint. This optimal point is determined by several conditions in microeconomics.
- Ratios of all marginal utilities are equal:
At the optimal consumption point, the consumer allocates their budget in such a way that the marginal utility per dollar spent on each good is equal. This means that for two goods, the marginal utility of one good (MUx) divided by its price (Px) should equal the marginal utility of the other good (MUy) divided by its price (Py). Mathematically: [
\frac{MUx}{Px} = \frac{MUy}{Py}
] This ensures that the consumer is not able to increase utility by reallocating spending between the two goods. - Marginal rate of substitution equals the relative price ratio:
The marginal rate of substitution (MRS) reflects how much of one good a consumer is willing to give up to obtain one more unit of another good, holding utility constant. The MRS is equal to the absolute value of the slope of the indifference curve. At the optimal consumption point, the consumer will adjust their consumption such that the MRS between two goods is equal to the price ratio of those goods: [
MRS = \frac{Px}{Py}
] This condition is essential for optimal allocation of resources. If the MRS does not match the price ratio, the consumer can increase utility by changing their consumption pattern. - Slope of the indifference curve exceeds the slope of the budget constraint:
This statement is incorrect in the context of optimal consumption. If the slope of the indifference curve (MRS) exceeds the slope of the budget constraint (the price ratio), it indicates that the consumer is not at an optimal point. The consumer would then be able to increase utility by reallocating spending, meaning they are not optimizing.
Thus, option c is the correct choice because both of the first two conditions must hold true for the consumer to be at the optimal consumption point.