What does the tangency between an indifference curve and the budget line determine?
What will be an ideal response?
The point of tangency between the budget line and an indifference curve tells us that for a given income level, that point is the best combination for the consumer. That combination of goods is the one that will maximize utility, given the consumer's income. Since the budget line is straight, linear, and downward sloping, its slope is the price-ratio, and this represents the opportunity cost of one good in terms of the other. Indifference curves are convex to the origin, and the slope of an indifference curve is different at each point. Further, the slope of an indifference curve at any point can be found by drawing a tangent at that point. This slope tells us the subjective opportunity cost for the consumer, of one good in terms of the other. The point of tangency between the budget line and an indifference curve brings the two opportunity costs together and sets them equal to each other. Any other combination is hence inefficient from the consumer's point of view.
You might also like to view...
Which of the following statements is true?
A) Macroeconomics studies how individuals make choices. B) Microeconomics is the study of an economy as a whole. C) The study of the inflation rate is covered under microeconomics. D) The study of the unemployment rate is covered under macroeconomics.
According to 2014 data on the U.S. population, which of the following was correct?
a. Adults of prime working age (ages 25-54) had both higher labor-force participation rates and higher rates of unemployment compared to teenagers. b. Adults of prime working age (ages 25-54) had higher labor-force participation rates and lower rates of unemployment compared to teenagers. c. Adults of prime working age (ages 25-54) had both lower labor-force participation rates and lower rates of unemployment compared to teenagers. d. Adults of prime working age (ages 25-54) had lower labor-force participation rates and higher rates of unemployment compared to teenagers.
GNI per capita can be adjusted by purchasing power to account for differences in the cost of living.
a. true b. false
Suppose that Jessica's MU/P is 8 for swimming lessons, 12 for voice lessons, and 4 for piano lessons. In order for Jessica to maximize total utility, she should definitely
a. take more swimming lessons b. take more voice lessons c. take more piano lessons d. find some other activities because the values for MU/P are very low e. take fewer lessons of each type