An optimizing consumer will select the consumption bundle in which the
A)ratio of total utilities is equal to the relative price ratio.
B)ratio of income to price equals the marginal rate of substitution.
C)marginal rate of substitution is equal to the relative price ratio of the goods.
D)marginal rate of substitution is equal to marginal utility.

Question

Quizplus · Accepted Answer

An optimizing consumer will select the consumption bundle in which the marginal rate of substitution is equal to the relative price ratio of the goods. This is because the consumer would not continue to substitute one good for another if it cost more in terms of the lost utility of the good substituted away from than the gained utility of the good substituted to. Therefore, the consumer will choose the bundle where the marginal rate of substitution (MRS) between the two goods is equal to the ratio of their prices, because this represents the point where the consumer can no longer gain any extra utility from further substitution.

An Optimizing Consumer Will Select the Consumption Bundle in Which