An optimizing consumer will select the consumption bundle in which the marginal rate of substitution
A)is equal to the relative price ratio of the goods.
B)exceeds the marginal utility of each good by the greatest amount.
C)is less than the slope of the budget constraint.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

The optimizing consumer will select the consumption bundle in which the marginal rate of substitution (MRS) equals the relative price ratio of the goods. This is because the MRS measures the rate at which a consumer is willing to trade one good for another, and the relative price ratio measures the rate at which the market is willing to trade one good for another. Therefore, the optimal consumption bundle is the one that balances these two rates. Option B is incorrect because the optimizing consumer will select the consumption bundle in which the marginal utility per dollar spent is equal for both goods, not the one in which the marginal utility of each good exceeds the other by the greatest amount. Option C is also incorrect because the slope of the budget constraint measures the relative price ratio of the goods, so if the MRS is less than the slope, the consumer is not willing to trade the goods at a rate that the market is willing to offer.

An Optimizing Consumer Will Select the Consumption Bundle in Which