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In economics, it is generally assumed that the consumer is a rational individual. A rational individual clearly knows what is good or what is bad for her, and in any given situation, she always tries to achieve the best for herself. Thus, not only does a consumer have well-defined preferences over the set of available bundles, she also acts according to her preferences. From the bundles which are available to her, a rational consumer always chooses the one which gives her maximum satisfaction. In the earlier sections, it was observed that the budget set describes the bundles that are available to the consumer and her preferences over the available bundles can usually be represented by an indifference map. Therefore, the consumer’s problem can also be stated as follows: The rational consumer’s problem is to move to a point on the highest possible indifference curve given her budget set. If such a point exists, where would it be located? The optimum point would be located on the budget line. A point below the budget line cannot be the optimum. Compared to a point below the budget line, there is always some point on the budget line which contains more of at least one of the goods and no less of the other, and is, therefore, preferred by a consumer whose preferences are monotonic. Therefore, if the consumer’s preferences are monotonic, for any point below the budget line, there is some point on the budget line which is preferred by the consumer. Points above the budget line are not available to the consumer. Therefore, the optimum (most preferred) bundle of the consumer would be on the budget line. Where on the budget line will the optimum bundle be located? The point at which the budget line just touches (is tangent to), one of the indifference curves would be the optimum. To see why this is so, note that any point on the budget line other than the point at which it touches the indifference curve lies on a lower indifference curve and hence is inferior. Therefore, such a point cannot be the consumer’s optimum. The optimum bundle is located on the budget line at the point where the budget line is tangent to an indifference curve. 20 r i Figure 2.12 illustrates the c m consumer’s optimum. At (x , x ), the d n 1 2 r e budget line is tangent to the black n r coloured indifference curve. The first I i thing to note is that the indifference M curve just touching the budget line is the highest possible indifference curve given the consumer’s budget set. Bundles on the indifference curves above this, like the grey one, are not affordable. Points on the Consumer’s Optimum. The point (x , x ), at indifference curves below this, like the 1 2 blue one, are certainly inferior to the which the budget line is tangent to an points on the indifference curve, just indifference curve represents the consumers touching the budget line. Any other point on the budget line lies on a lower indifference curve and hence, is inferior to (x , x ). Therefore, (x , x ) is the consumer’s optimum bundle. 1 2 1 2 9To be more precise, if the situation is as depicted in Figure 2.12 then the optimum would be located at the point where the budget line is tangent to one of the indifference curves. However, there are other situations in which the optimum is at a point where the consumer spends her entire income on one of the goods only. Reprint 2026-27