When a consumer's marginal rate of substitution between X and Y is equal to the ratio of prices for X and Y,and when the consumer is spending all available income,then
A)the consumer is not maximizing his utility.
B)the budget line is tangent to the indifference curve at all quantities of X and Y.
C)a higher indifference curve can be reached given the existing budget line.
D)all budget lines are tangent to all indifference curves.
E)the budget line is tangent to an indifference curve.

Question

Quizplus · Accepted Answer

When the consumer's marginal rate of substitution between X and Y is equal to the ratio of prices for X and Y, then the budget line is tangent to an indifference curve at the point of optimal consumption. This is known as consumer equilibrium and represents the most preferred combination of X and Y that the consumer can afford. Therefore, the correct choice is E - the budget line is tangent to an indifference curve.

When a Consumer's Marginal Rate of Substitution Between X and Y