Economics, 3rd Edition

Th C

’ O

ti

FIGURE 5.11

Quantity

of cola

0

A

D

C

B

Quantity

of pizza

Budget constraint

I

1

I

2

I

3

I

4

Optimum

At the point of consumer equilibrium, the optimum, the slope of the indifference curve equals the slope 

of the budget constraint. We say that the indifference curve is tangential to the budget constraint. The 

slope of the indifference curve is the marginal rate of substitution between cola and pizza, and the slope 

of the budget constraint is the relative price of cola and pizza. Thus, the consumer chooses consumption 

of the two goods so that the marginal rate of substitution equals the relative price.

At the consumer optimum, the marginal rate of substitution equals the ratio of prices. That is: