Question

1)Using the utility approach, the consumer is in equilibrium when

A. the marginal utilities associated with consuming an extra unit of each good are equal.
B. total utility from each good is at a maximum.
C. the marginal utility per dollar’s worth of each good is equal.
D. the marginal utility association with consuming the last unit is zero.

Answer 1

Option C is correct

This implies that the ratio of marginal utility to its price is equal for all the goods consumed. For two goods equilibrium this implies that marginal utility / price for one good is equal to marginal utility / price for the other good. This is a necessary condition because this can be rearranged to give marginal utility of good one/marginal utility of good two = price of good one/price of good two.

This is nothing but the equality between marginal rate of substitution and the price ratio, which exhibit the tangency between the indifference curve and the budget line.