Question

My question is the optimal purchasing rule is satisfied when a budget line is tangent to an indifference curve. Explain it with economic reason and diagram.

Answer 1

• First we know that BL( budget line) is an income constraint while IC ( indifference curve) is a consumer's satisfaction constraint.
• A consumer wishes to achieve the highest level of satisfaction but due to his income constraint only maximizes its satisfaction level within its income constraint.
• According to the optimal rule, budget line and indifference curve intersects and the optimal level is achieved thus, that combination of goods must be purchased and consumed.
• From the figure above, X* and Y* are optimal bundles according to the optimal purchasing rule for good X and good Y respectively.