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Optimal Consumption Bundle

The point where the highest attainable indifference curve is tangent to the budget constraint. This tangency condition defines the optimal choice.

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The statement of the theorem

The optimal consumption bundle

(x^*, y^*)

is the point of tangency between the highest attainable indifference curve

I_{U^*}

and the budget constraint

B

. This condition requires that the Marginal Rate of Substitution equals the ratio of the prices:

MRS_{xy} = \frac{P_x}{P_y}

This condition, combined with the budget constraint, yields the optimal solution

(x^*, y^*)

Source: Wikipedia