Question

Why does the consumer choose a point where the indifference curve is tangent to the budget line?

Answer 1

Because it maximizes their utility (satisfaction) given their financial limits, a consumer choose the point where an indifference curve is tangent to the budget line. The consumer's current budget does not allow them to achieve a higher level of utility.

1. Budget line: The budget line shows every potential pairing of two items that a customer can purchase given their income and the prices listed.
2. Indifference Curve: An indifference curve displays every possible pairing of two products that yields the same degree of customer pleasure. Utility maximization is the goal of consumers, who seek to maximize their utility by achieving the maximum indifference curve.
3. Tangency: Since it enables the consumer to attain the maximum degree of happiness without going over their budget, the point of tangency between an indifference curve and the budget line is the most desired combination of things they can buy.
4. Tangency vs. Intersection: When the budget line crosses an indifference curve, it is not ideal because the consumer may spend the same budget to purchase a different combination of items that would result in a higher indifference curve (and therefore better utility).