week and faces money prices of $12 per unit for clothing and $24 per unit
for food. A combination of units of clothing and food indicated by point
on is attainable but, by moving along the budget line, Hugh can reach
higher indifference curves. The same is true at b on and at c on
however, where an indifference curve is tangent to the budget line,
Hugh cannot reach a higher curve by moving along the budget line.
Because Hugh wants to maximize utility, he wants to reach the highest
attainable indifference curve. Inspection of Figure 6A-4 shows that if
Hugh purchases any bundle on the budget line at a point cut by an
indifference curve, he can reach a higher indifference curve. Only when
the bundle purchased is such that the indifference curve is tangent to the
budget line is it impossible for Hugh to reach a higher curve by altering
his purchases.
The consumer’s utility is maximized at the point where an indifference curve is tangent to the
budget line. At that point, the consumer’s marginal rate of substitution for the two goods is
equal to the relative prices of the two goods.The intuitive explanation for this result is that if Hugh values goods
differently from the way the market does, there is room for profitable
exchange. Hugh can give up some of the good that he values relatively
less than the market does and take in return some of the good that he
values relatively more than the market does. When he is prepared to
exchange goods at the same rate as they can be traded on the market,
there is no further opportunity for him to raise utility by substituting one
product for the other.
I 1
I 2 I 3.
(I 4 )