How does a shopper spend a fixed budget to be happiest? At the sweet spot where the budget line just kisses the highest reachable indifference curve.
Consumer ChoiceLive
indifference curves & budget
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A consumer maximizes utility subject to a budget. Indifference curves connect equally-satisfying bundles; the budget line shows what income affords. The best choice is where the budget line just touches the highest reachable indifference curve — the tangency where the marginal rate of substitution equals the price ratio. Change a price and watch the optimal bundle move.
Reading this result: With Cobb-Douglas preferences the optimal bundle spends a fixed income share on each good — here 50% of income (50) buys X and 50% buys Y, no matter how prices move; a price only changes how many units that fixed budget buys.
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How it works
Indifference curves connect bundles of two goods that give equal satisfaction; higher curves mean more utility. The budget line shows every affordable bundle. The optimal choice is the tangency point, where the marginal rate of substitution equals the price ratio. Changing a price or income pivots the budget line and shifts the optimum — the core model of consumer demand.
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