Question

The consumer is in equilibrium at a point where the budget line ______.

Options

• Is above an indifference curve

• Is below an indifference curve

• Is tangent to an indifference curve

• Cuts an indifference curve

Answer 1

The consumer is in equilibrium at a point where the budget line is tangent to an indifference curve.

Explanation:

At the standard interior equilibrium, the budget line is tangent to the highest attainable indifference curve. At tangency, MRS equals the price ratio.