Tag: indifference curve

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Multiple choice business economics and quantitative methods government budget and economy consumer's budget public finance indifference curve

________ represent the various combinations of two goods which can be purchased with a given money income and assumed prices of goods.

  1. Budget line

  2. Market line

  3. <span>Price line</span>

  4. Both A &amp; C
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The budget line and price line are synonymous terms for the graphical representation of all possible combinations of two goods that a consumer can purchase given their income and market prices.

Multiple choice business economics and quantitative methods government budget and economy consumer's budget public finance indifference curve

The consumer is in equilibrium at a point where the budget line _________.

  1. is above the indifference curve

  2. is below the indifference curve

  3. is tangent to the indifference curve

  4. cuts the indifference curve
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The equilibrium is when the ratio of the price of goods is equal to the marginal rate of substitution. The ratio of price of goods comes from the budget line whereas the marginal rate of substitution is derived from the point of tangency on the indifference curve. 

Multiple choice business economics and quantitative methods government budget and economy consumer's budget public finance indifference curve

IC theory assumes that ________.

  1. buyers can measures satisfaction

  2. buyers can identify preferred combinations of goods

  3. all buyers have same preference patterns

  4. none of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The indifference curve theory has 5 major assumptions. These are as follows: 

1) The consumer has constant income and can only purchase a combination of two goods.
2) The consumer always wants to be able to consumer more goods an knows exactly the combination of goods he desires. 
3) You are assuming ordinal utility which a consumer can rank the combination of goods depending on the utility he derives from it. 
4) Diminishing rate of marginal utility
5) Cosumers behaves in a rational manner, that is, always looks to increase his utility. 

Multiple choice business economics and quantitative methods government budget and economy consumer's budget public finance indifference curve

The slope of the budget line with product 'Y' on the vertical axis and product 'X' on the horizontal axis is __________.

  1. P$ _{y}/P _{x}$

  2. X/Y

  3. Y/X

  4. P$ _{x}/P _{y}$
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

P$ _{x}/P _{y}$ is the ratio of prices between good X and good Y which make one half if the indifference curve analysis. The value of ratio of price of goods is equal to the MRS which is obtained from the indifference curve. 

Multiple choice business economics and quantitative methods government budget and economy consumer's budget public finance indifference curve

Where the budget line is tangent to an IC,  ________.

  1. equals amounts of goods give equal satisfaction

  2. the ratio of price of the goods equals the MRS

  3. the prices of the goods are equal

  4. none of the above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The ratio of prices between good X and good Y which make one half if the indifference curve analysis. The value of ratio of price of goods is equal to the MRS which is obtained from the indifference curve. This gives the consumers equilibrium 

Multiple choice business economics and quantitative methods government budget and economy consumer's budget public finance indifference curve

An IC shows all combinations of two commodities which ________.

  1. give the same level of satisfaction to the consumer

  2. represent the highest level of satisfaction to the consumer

  3. give the different level of satisfaction to the consumer

  4. none of the above
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

An indifference curve shows all the possible combination of two goods with a constant level of income. All the points on an indifference curve give the same level of satisfaction as the consumer does reduce the efficiency of spending but just switches between his preference for the two goods.

Multiple choice business economics and quantitative methods government budget and economy consumer's budget public finance indifference curve

Substitution effect for a fall in the price of a commodity is given by _________.

  1. an upward shift in indifference curve

  2. an movement up of a given indifference curve

  3. a downward shift in indifference curve

  4. a movement down a given indifference curve
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

In the indifference curve analysis we assume that a consumer has to choose between two goods and that his/her income is constant. If the price of either one or both the goods reduces, it means the consumer can purchase more goods. The result of an change in purchase of either good due to change in price of good with no change in income results in a substitution effect. This is the same as the income effect. This is because for normal goods both the income and substitution effect work in the same direction. 

Multiple choice business economics and quantitative methods government budget and economy consumer's budget public finance indifference curve

Balance of current account includes _________.

  1. balance of services

  2. balance of unilateral transfers

  3. balance of trade

  4. all of above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The current account balance is composed of the balance of trade (goods), the balance of services (invisibles), and net unilateral transfers (remittances, grants).

Multiple choice business economics and quantitative methods government budget and economy consumer's budget public finance indifference curve

The change to a new indifference curve following a rise in aggregate consumption caused by a price cut is called the ________.

  1. consumption effect

  2. price effect

  3. income effect

  4. substitution effect
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The price effect is the total change in consumption resulting from a change in the price of a good, which encompasses both the substitution effect and the income effect.