Question

Given below are two statements, one is labelled as Assertion (A) and other one labelled as Reason (R).
Assertion (A): The consumer equilibrium lies at the point of tangency between the indifference (ID) curve and the budget line
Reason (R): This is the point where consumer obtains the maximum satisfaction from his given budget
In light of the above statements, choose the correct answer from the options given below.

• A. Both (A) and (R) are correct and (R) is the correct explanation of (A).
• B. Both (A) and (R) are correct but (R) is NOT the correct explanation of (A).
• C. (A) is correct but (R) is not correct.
• D. (A) is not correct but (R) is correct.

Hint:

At consumer equilibrium:
\[ MRS_{xy} = \frac{P_x}{P_y} \] This mathematical equality occurs only at the geometric point of tangency between the budget line and the indifference curve.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
This question tests ordinal utility theory, focusing on how a consumer achieves equilibrium using an indifference curve map and a budget constraint.

Step 3: Detailed Explanation:
Let us break down the microeconomic principles of consumer behavior:
- Assertion (A): A consumer is in equilibrium when they maximize their utility given their limited budget.
Graphically, this occurs where the budget line is tangent to the highest possible indifference curve.
At this point of tangency, the slope of the indifference curve (which represents the Marginal Rate of Substitution, \(MRS_{xy}\)) equals the slope of the budget line (which represents the price ratio of the two goods, \(P_x / P_y\)).
Thus, the consumer cannot reach a higher level of satisfaction given their budget constraint.
Therefore, Assertion (A) is correct.
- Reason (R): The primary goal of a rational consumer is utility maximization.
The tangency point represents the highest indifference curve that touches the budget line.
Any point below the budget line is affordable but does not maximize satisfaction.
Any point on a higher indifference curve is desirable but completely unaffordable.
Thus, the tangency point is the unique combination of goods where the consumer obtains maximum satisfaction within their budget.
Therefore, Reason (R) is correct.
Since the definition of consumer equilibrium is the maximization of satisfaction within a budget constraint, Reason (R) directly explains why the equilibrium must lie at the point of tangency.
Thus, (R) is the correct explanation of (A).

Step 4: Final Answer:
Both (A) and (R) are correct, and (R) is the correct explanation of (A).
Therefore, the correct choice is Option (A).