Asked by Gerson Torres on Jun 24, 2024
Verified
Explain the relationship between the budget constraint and indifference curve at a consumer's optimum.
Budget Constraint
An economic framework representing the combinations of goods and services an individual can purchase, given their income and the prices of those goods and services.
Indifference Curve
A graphical representation showing combinations of goods between which a consumer is indifferent, implying equal utility.
- Understand the concept of consumer optimum and how it is determined by the intersection of budget constraints and indifference curves.
Verified Answer
AA
Abbeygale AshmanJun 28, 2024
Final Answer :
Because the budget constraint is tangent to the indifference curve at a consumer's optimum, the slope of the budget constraint (relative market prices) and the slope of the indifference curve (the marginal rate of substitution) are equal at the optimal consumption point and only at that point.
Learning Objectives
- Understand the concept of consumer optimum and how it is determined by the intersection of budget constraints and indifference curves.