Question

Tangency between the Price line and indifference curve is the expression of Proportionality between utility and price, explain?

Answer 1

The point of consumer equilibrium, when the consumer maximizes satisfaction within their budget, is represented by the tangency between the price line and the indifference curve. The ratio of the two items' prices now represents the Marginal Rate of Substitution (MRS) between them:

`MRS_(XY) = (P_X)/(P_Y)`

Since `MRS_(XY) = (P_X)/(P_Y)`, we get 

`(MU_X)/(P_X) = (MU_Y)/(P_Y)`

This shows that each good has an equal marginal utility per rupee invested. As a result, tangency demonstrates the proportionality between price and utility, showing that the consumer is allocating their income to maximize satisfaction.