5.17 : Consumer Choice II

Consumer choice involves selecting a bundle that provides the highest level of satisfaction to the consumer under the constraints of their budget.

The student's budget represents all the combinations of books and snacks he can afford with his $100 weekly allowance. His preferences for these products are represented by indifference curves. Higher indifference curves provide higher levels of satisfaction.

When the student chooses how to spend his allowance, he wants to ensure maximum satisfaction. He wants the bundle of goods that is on the highest possible indifference curve. However, he must also stay within his budget constraint.

This means that the student's optimal bundle is determined where the budget line meets the highest possible indifference curve.

While the student will prefer a bundle above this, which provides more satisfaction, he can't afford it as it lies beyond his budget. He could afford a bundle on a lower indifference curve, but it offers less satisfaction. So, the bundle lying on the point of tangency between the budget line and the highest possible indifference curve is the optimal bundle to buy.