In this chapter, we looked at how consumers decide what to consume. This decision combines two characteristics of consumers, their preferences (embodied in their utility functions) and their income, and one characteristic of the market, the goods’ prices.

We saw that a consumer maximizes her utility from consumption when she chooses a bundle of goods such that the marginal rate of substitution between the goods equals their relative prices. That is, in this bundle the ratio of the goods’ marginal utilities equals their price ratio. Equivalently, the goods’ marginal utilities per dollar spent are equal. If this property didn’t hold, a consumer could make herself better off by consuming more of the good with the high marginal utility per dollar and less of the good with the low marginal utility per dollar.

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