Question

A budget set shows an affordable set. How do you determine which of these affordable combinations you should buy?

Answer 1

The budget set includes consumption bundle that the consumer can afford to consume with the given level of income. It is assume that the highest level of satisfaction in terms of utility is achieved when the selected bundle lies on the budget line. this implies that the selected bundle should be income exhausting.

Anywhere on the budget line the highest possible indifference curve should be tangent. This tangency will determine the optimal bundle to be selected. Mathematically, this bundle will ensure that slope of the indifference curve is equal to the slope of the the slope of line. This is the required condition under constrained optimisation.