Question

A consumer reaches equilibrium when:

• A. Income becomes zero
• B. Marginal utility becomes negative
• C. Budget line is tangent to indifference curve
• D. Prices increase continuously

Hint:

"Tangent" means the two lines just touch at one point. At this point, the slope of the budget line and the slope of the indifference curve are equal!

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
Consumer equilibrium refers to a situation where a consumer spends their limited income on various goods in such a way that they get maximum satisfaction.

Step 2: Detailed Explanation:
In the Indifference Curve (IC) analysis, equilibrium is reached at the point where: 1. The Budget Line (which represents income and price constraints) is exactly tangent to the Indifference Curve (which represents preferences). 2. At this point, the Marginal Rate of Substitution (MRS) equals the price ratio ($P_x/P_y$). 3. The consumer is on the highest possible IC they can afford.

Step 3: Final Answer:
Equilibrium occurs when the budget line is tangent to the indifference curve.