Question

A consumer's utility is maximized

a. at the point where the budget line is tangent to an indifference curve
b. at any point where the budget line intersects with an indifference curve
c. at any point where all of the consumer's income is spent

Answer 1

The consumer's utility is maximized at the point where the budget line is tangent to an indifference curve. This represents the highest achievable satisfaction given the consumer's budget constraints.

Step-by-step explanation:

The consumer's utility is maximized at the point where the budget line is tangent to an indifference curve. This is because the point of tangency represents the highest achievable indifference curve that the consumer can reach given their budget constraints. At this point, the consumer is allocating their income in a way that maximizes their satisfaction or utility.

For example, if the consumer is buying two goods, a substitution effect occurs when the price of one good changes, leading the consumer to buy less of the relatively more expensive good and more of the relatively cheaper good. The income effect, on the other hand, motivates the consumer to buy more of both goods if their utility rises or less of both goods if their utility falls.