Question

Why is the consumer in equilibrium when he buys only that combination of the
two goods that is shown at the point of tangency of the budget line with an
indifference curve? Explain���

Answer 1

At the point of tangency of budget line and indifference curve the MRS is equal to price ratio. This suggests that at this point the consumer's willingness to purchase equals to what he can actually purchase. This is the best possible point that can be purchased by the consumer given his money income. If the consumer is at any other point he would tend to rearrange the consumption to again reach this point.