Figure 3.4
5. Explain y a person’s marginal rate of substitution between two goods must equal the ratio of the price owhf the goods for the consumer to achieve maximum satisfaction.
The MRS describes the rate at which the consumer is willing to trade one good for another to maintain the same level of satisfaction. The ratio of prices describes the trade-off that the market is willing to make between the same two goods. The tangency of the indifference curve with the budget line represents the point at which the trade-offs are equal and consumer satisfaction is maximized. If the MRS between two goods is not equal to the ratio of prices, then the consumer could trade one good for another at market prices to obtain higher levels of satisfaction. This trading continues until the highest level of satisfaction is achieved.
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