Tag: public finance

Questions Related to public finance

________ 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

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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. 

IC theory assumes that ________.

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

  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

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Correct Option: B
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. 

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

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

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

  2. X/Y

  3. Y/X

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

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Correct Option: D
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. 

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

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

  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

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Correct Option: B
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 

An IC shows all combinations of two commodities which ________.

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

  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

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Correct Option: A
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.

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

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

  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

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Correct Option: D
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. 

Balance of current account includes _________.

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

  1. balance of services

  2. balance of unilateral transfers

  3. balance of trade

  4. all of above

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Correct Option: D

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

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

  1. consumption effect

  2. price effect

  3. income effect

  4. substitution effect

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Correct Option: B