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) a higher indifference curve can be reached given the existing budget line.
B) all budget lines are tangent to all indifference curves.
C) the consumer is not maximizing his utility.
D) the budget line is tangent to the indifference curve at all quantities of X and Y.
E) the budget line is tangent to the indifference curve.

Question

Quizplus · Accepted Answer

This situation represents the consumer achieving equilibrium, where the budget line (representing all combinations of X and Y affordable with available income) is tangent to the indifference curve (representing all combinations of X and Y that provide the same level of satisfaction). At this point of tangency, the consumer is maximizing utility by allocating income between X and Y such that the marginal rate of substitution equals the price ratio. Any movement away from this point would result in a decrease in utility, as the consumer would either have to give up more of one good than is desired to obtain more of the other or would have to forgo some consumption altogether due to budget constraints.

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