Practice question · Multiple choice
At the optimum the indifference curve is tangent to the budget line. What does tangency mean in words a shopper would recognise?
Hints
- The slopes are equal at tangency. What does each slope mean?
- If her willingness to trade differed from the market's rate, what could she do?
Show the answer
C. Her willingness to swap equals the market's rate
Why
Slope of the indifference curve is willingness to trade, slope of the budget line is the market's rate, and equality means no profitable rearrangement is left. Spending the whole budget is necessary and not sufficient, every point on the line does that, and only one is optimal.
Practise Utility Maximization
The app has 8 more questions on this lesson, and keeps your place in the course. Business I is free to start.
More questions on Utility Maximization
- If income doubles from 100 to 200 while prices stay fixed, the budget line shifts outward. Estimate the new…
- Which are true at the optimal consumption bundle?
- Order the steps of utility maximisation.
- At the optimum, MUx/px = MUy/py. Why must the ratios be equal rather than the marginal utilities themselves?