Tag: government budget and economy

Questions Related to government budget and economy

A relative price is ________.

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

  1. price expressed in terms of money

  2. what you get paid for baby sitting your cousin

  3. the ratio of one price to another

  4. equal to a money price

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Correct Option: C
Explanation:

Many substitute goods nowadays have relative pricing. This is especially true in competitive markets such as soaps, wherein the consumer would try to purchase one which is not very expensive. This is also true for the smartphone market. Also, the price of products is relative to the price of the raw materials used in making the product. 

Indifference curves are always ________.

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

  1. convex to the origin

  2. concave to the origin

  3. parallel to the X-Axis

  4. parallel to the Y-Axis

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Correct Option: A
Explanation:

Indifference curves are convex. This means the are downward sloping. Indifference curves will only be concave if the good are inferior. 

Which of the following statements is correct?

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

  1. An indifference curve is downward-sloping to the right

  2. Convexity of a curve implies that the slope of the curve diminishes as one moves from left to right

  3. The elasticity of substitution between two goods to a consumer is zero.

  4. The total effect of a change in the price of a good on its quantity demanded is called the price effect.

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Correct Option: C
Explanation:

Option A is wrong as indifference curve has positive and negative slopes. 

Option B is wrong as convexity of curve in fact implies the slope of the curve does not diminish as it goes from left to right. 
Option D is wrong because the price effect is equal to substitution effect plus income effect. 
Option C is correct because each good would derive the consumer a different utility unless they are perfect substitutes. 

Which one is not an assumption of the theory of demand based on analysis of indifference curves?

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

  1. Given scale of preferences as between different combinations of two goods.

  2. Diminishing marginal rate of substitution.

  3. Constant marginal utility of money

  4. Consumer would always prefer more of a particular good to less of the other good, other things remaining the same.

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Correct Option: C
Explanation:

The marginal utility of money changes depending on the inflation. Higher the inflation lower would be the utility of money as inflation reduces the value of the money and vice versa.

By consumer surplus economists mean _________

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

  1. the area inside the budget line

  2. the difference between the maximum amount a person is willing to pay for a good and its market price

  3. the area between the average revenue and marginal revenue curves

  4. none of the above

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Correct Option: B
Explanation:

The consumer surplus for various helps us understand its value in the market. The consumer surplus for necessities is the highest and the prices of these goods are generally low and since they are essential for survival consumers would be willing to pay a high amount for these goods. 

Higher level of indifference curve shows lower level of satisfaction.

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

  1. True

  2. False

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Correct Option: B
Explanation:

A higher level of indifference curve shows higher level of satisfaction. The indifference curve would have shifted outwards due to reduction in price of goods or an increase in income which allows the consumer to purchase more goods which gives him a higher utility. 

Indifference curves intersect Y-Axis.

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

  1. True

  2. False

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Correct Option: B
Explanation:

If the indifference curve touches the y axis it would mean that the consumer is completely satisfied by consuming only one good. This is clearly wrong as on requires more than one good to be satisfied. 

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

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

  1. Budget line

  2. Market line

  3. Price line

  4. Both A & C

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Correct Option: D

Indifference curves do not touch X-Axis.

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

  1. True

  2. False

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Correct Option: A
Explanation:

If the indifference curve touches the x axis it would mean that the consumer is completely satisfied by consuming only one good. This is clearly wrong as on requires more than one good to be satisfied. 

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

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

  1. is above the indifference curve

  2. is below the indifference curve

  3. is tangent to the indifference curve

  4. cuts the indifference curve

Show answer
Correct Option: C
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.