Question

Explain the conditions that are met when a consumer has found the best affordable combination of goods to buy. (Use the terms Budget line, Marginal Rate of Substitution and Relative Price in your Explanation) Also graphically illustrate the best affordable combination. [4 Marks]

Answer 1

The consumer's optimal combination of goods is at the point where the budget line is tangent to an indifference curve or where the marginal rate of substitution (MRS) is equal to the opportunity cost or relative price of the two goods, as indicated by the slope of the budget constraint.