FIGURE D.7 Understanding the Relative Price RuleThe relative price of rooms in terms of restaurant meals is equal to the negative of the slope of the budget line. The marginal rate of substitution of rooms for restaurant meals is equal to the negative of the slope of the indifference curve. The relative price rule says that at the optimal consumption bundle, the marginal rate of substitution must equal the relative price. This point can be demonstrated by considering what happens when the marginal rate of substitution is not equal to the relative price. At consumption bundle B, the marginal rate of substitution is larger than the relative price; Ingrid can increase her total utility by moving down her budget line, BL. At C, the marginal rate of substitution is smaller than the relative price, and Ingrid can increase her total utility by moving up the budget line. Only at A, where the relative price rule holds, is her total utility maximized, given her budget constraint.