Which of the following statements is correct? A consumer will be maximising utility when:
(i) the indifference curve is tangent to the budget constraint
(ii) the marginal rate of substitution equals the ratio of the prices
(iii) the marginal utility per dollar spent on good x is equal to the marginal utility per dollar spent on good Y
A)(i) only
B)(ii) only
C)(i) and (ii) only
D)(i), (ii) and (iii) only

Question

Quizplus · Accepted Answer

(i) A consumer will be maximising utility when the indifference curve is tangent to the budget constraint as that shows the consumer is spending all their income and is at the optimal combination of goods.
(ii) The marginal rate of substitution equals the ratio of the prices when the consumer is getting the most out of their money and when they are not willing to trade any more of one good for more of another good.
(iii) The marginal utility per dollar spent on good x is equal to the marginal utility per dollar spent on good Y when the consumer cannot reallocate their budget to increase satisfaction any further. These all show that the consumer is at their optimal point of consumption.

Which of the Following Statements Is Correct? a Consumer Will