Question

Consider a consumer with textbook preferences defined over two goods x1 and x2. Why is the condition MRS = p1/p2 necessary for utility maximization? Is this condition alone sufficient?

Answer 1

If the utility is maximized under a particular budgetary constraint, a reasonable user will be in equilibrium. The preference of consumer consumption that maximizes the utility of consumers is called the optimal choice. The tangent on indifference curve of budget line determine the consumption bundle. At the point of tangential slope, the curve of indifference will be equal to the curve of the budget line.

Because the marginal substitution level is calculated by the marginal utility ratio. The optimal level is therefore MUX1 / MUX2 = P1 / P2.

Equality is essential since the rates that the consumer wants to replace one commodity with another are the marginal substitution rate, while the price ratio is that with which the buyer can trade one commodity for another.

Thus, the consumer will alter its consumption when MRS is not equal to P1 / P2. For instance, when MRS is larger than P1 / P2, consumers prefer to buy more good X1, less good X2.

No! Alone it is not sufficient.

MRS must continue to decrease and the curve of indifference should be convex to its source. It means that the cost of good X2 continues to decrease as customers obtain additional good X1.

As the consumer gets more units of good X1 his Marginal Utility for good X1 will decrease as well as his sacrifices to gain good X1 will also decrease because of the Law of Diminishing Marginal Utility. The convexity of the Indifference Curve offers an extraordinary flat orientation under which the budget line can be tangent.

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