Question

Explain why a marginal rate of substitution between two goods must equal the ratio of prices of the goods for the consumer to achieve maximum satisfaction. A consumer achieves maximum satisfaction when the marginal rate of substitution is equal to the ratio of prices because

A. otherwise the consumer could trade one good for another at market prices to obtain a higher level of satisfaction.
B. the marginal rate of substitution is equal to the ratio of the goods' marginal utilities when satisfaction is maximized.
C. satisfaction is maximized when an individual consumes an equal amount of all goods.
D. satisfaction is maximized when an individual consumes the same amount of each good as other consumers.
E. the marginal rate of substitution is less than the magnitude of the slope of the indifference curve when satisfaction is maximized.

Answer 1

The correct answer is option A.

Step-by-step explanation:

For maximizing total utility or to derive maximum satisfaction from consumption to two goods, the marginal rate of substitution of two goods should be equal to the ratio of prices of these two goods.

If this is not the case, then the consumer would be able to maximize their utility by increasing the consumption of one good and decreasing consumption of the other.