6A.3 The Consumer’s Utility-­Maximizing Choices

Question 1

Where is a consumers utility maximized on a graph that includes a budget line and an indifference curve?

Answer 1

The consumer’s utility is maximized at the point where an indifference curve is tangent to the budget line. At that point, the consumer’s marginal rate of substitution for the two goods is equal to the relative prices of the two goods.

Question 2

What is an income-consumption line?

Answer 2

If we move the budget line through all possible levels of income, and if we join up all the utility-maximizing points, we will trace out what is called an income-consumption line,

Question 3

What does an income-consumption line show?

Answer 3

The income-consumption line shows how the consumer’s purchases react to a change in money income with relative prices being held constant.

Question 4

What is the price consumption line?

Answer 4

The price-consumption line shows how the consumer’s purchases react to a change in one price with money income and other prices being held constant.