The slope of the budget line of a consumer buying two goods X and Y is given by:
- A.Price of X ÷ price of Y
- B.Price of Y ÷ price of X
- C.Income ÷ price of X
- D.MU of X ÷ MU of Y
Correct answer
Explanation
The correct answer is A, the price of X divided by the price of Y. The budget line is the equation Px·X + Py·Y = M, which on rearranging gives Y = M ÷ Py minus (Px ÷ Py)·X, so the intercept is income divided by the price of Y and the slope is the ratio of the price of the good on the horizontal axis to that of the good on the vertical axis. Option B is wrong because it inverts the ratio, which is the single commonest mistake in this question. Option C is wrong because income divided by the price of X is the horizontal intercept, the maximum quantity of X the consumer could buy, not the slope. Option D is wrong because the ratio of marginal utilities is the marginal rate of substitution, the slope of the indifference curve, which equals the price ratio only at equilibrium.
Read the full article: Utility and Indifference Curves: Consumer Behaviour Notes
Practice Questions
View allThe cardinal utility approach to consumer behaviour, which measures utility in units called utils, is associated with:
- A.Alfred Marshall
- B.J. R. Hicks
- C.Paul Samuelson
- D.Vilfredo Pareto
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Marshall, in his Principles of Economics, built the theory of demand on the assumption that utility is measurable in imaginary units, so that a consumer can compare the ten utils of a cup of tea with the six utils of a samosa; from this assumption he derived the law of…
Read the full explanation →Total utility is maximum when marginal utility is:
- A.Maximum
- B.Zero
- C.Negative
- D.Equal to average utility
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Marginal utility is the addition made to total utility by one more unit, so as long as it is positive total utility keeps rising; the moment it becomes zero nothing more is being added and total utility stands at its highest point, called the point of satiety.
Read the full explanation →The slope of an indifference curve at any point is called the:
- A.Marginal rate of substitution
- B.Price ratio
- C.Marginal propensity to consume
- D.Elasticity of substitution
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The marginal rate of substitution of X for Y is the number of units of Y a consumer is willing to give up to get one more unit of X while remaining on the same indifference curve, and it equals the ratio of the marginal utility of X to the…
Read the full explanation →An indifference curve is convex to the origin because of:
- A.Increasing marginal rate of substitution
- B.Diminishing marginal rate of substitution
- C.Constant marginal rate of substitution
- D.Diminishing returns to scale
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As a consumer moves down an indifference curve he holds more and more of the first good and less of the second, so each extra unit of the first is worth fewer units of the second to him; the slope therefore becomes flatter from left to right and the curve…
Read the full explanation →Which of the following is NOT a property of an indifference curve?
- A.It slopes downward from left to right
- B.It is convex to the origin
- C.Two indifference curves can intersect each other
- D.A higher indifference curve shows a higher level of satisfaction
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If two curves crossed, the combination at the crossing point would belong to both and would therefore give two different levels of satisfaction at the same time, a logical contradiction; for the same reason they cannot even be tangent.
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