Concept:Consumer equilibrium occurs where the budget line is tangent to the highest attainable indifference curve.
Explanation:The consumer tries to maximize total satisfaction using a limited income.
Therefore, the best combination of goods
X and
Y must be affordable and must give the highest possible utility.
At the equilibrium point, the slope of the indifference curve equals the slope of the budget line, expressed as
MRSXY=PYPX.
If the budget line only cuts an indifference curve, the consumer can still move to a higher indifference curve, so that point cannot be equilibrium.
From the diagram, point
K is the point of tangency between the budget line and the highest attainable indifference curve.
Hence, the consumer is at equilibrium at point
K.
Answer:D.
K
