Question

5.​With a given budget, the highest indifference curve that a consumer can reach is the

​a.​one that is tangent to the budget constraint.

​b.​indifference curve farthest from the origin

​c.​indifference curve that intersects the budget constraint in at least two places.

​d.​None of the above are correct; consumer preferences are bounded.

6.​The point where the highest attainable indifference curve and the budget constraint are tangent is called

​a.​the consumer’s equilibrium.

​b.​a utility maximum.

​c.​the consumer’s efficient allocation of resources.

​d.​the consumer’s optimal choice.

7.​Assume that a college student spends her income on Coke and Snickers. During finals week, the price of a Snickers candy bar is $0.75, and a can of Coke is $1. If she has $20 of income, she could choose to consume

​a.​8 Snickers bars and 15 cans of Coke.

​b.​7 Snickers bars and 16 cans of Coke.

​c.​4 Snickers bars and 17 cans of Coke.

​d.​2 Snickers bars and 20 cans of Coke.

8.​Which of the following costs would be regarded as an implicit cost?

​a.​the cost of accounting services

​b.​the opportunity cost of financial capital that has been invested in the business

​c.​the cost of compliance with government regulation

​d.​all costs that involve outlays of money by the firm

9.​Which of the following costs would be regarded as an explicit cost?

​a.​the cost of accounting services

​b.​the opportunity cost of financial capital that has been invested in the business

​c.​the cost of forgone labor earnings for an entrepreneur

d. forgone investment opportunities

Answer 1

Question 5

Option A is correct - One that is tangent to the budget constraint

An indifference curve shows different combination of two goods that can be purchased by the consumers. The utility or satisfaction from each combination is same and thus the consumer is indifferent to choose between any combination on the curve.

There is a budget constraint in this analysis which is represented by a budget line. A budget line shows a combination of two goods that a consumer can buy given the prices of the goods and the income level of the consumer.

Thus the optimal combination or maximum utility can be achieved at the point where these two meet or where the indifference curve is tangent to the budget line. At this point the Marginal Rate of substitution (MRS) (which is the absolute value of the slope of indifference curve) is equal to the price ratio of the two goods (which is the slope of the budget line).

Thus we will chose the point where indifference curve is tangent to the budget constraint.

Question 6

Option B is correct - A utility maximum

As discussed in the previous question, we can see that the consumer maximizes its utility at the point where the indifference curve is tangent to the budget line. It is at this point where the consumer gets its optimal combination of goods that give him maximum satisfaction given his income level and prices of the goods.

Question 7

Option C is correct - 4 Snickers bars and 20 cans of Coke

Budget line is given by the following equation: M = P1Q1 + P2Q2

Here, M is the income level, Q1 is the good 1 which is Snickers bar, P1 is the price of good 1 which is the Snickers bar, Q2 is the good 2 which is Coke, P2 is the price of Coke.

Given all this information, only 4 Snickers bars and 17 cans of Coke can fulfill the equation of the budget line.

M = P1Q1 + P2Q2

20 = 0.75*4 + 1*17

= 3 + 17

= 20

Thus option C is correct.

Question 8

Option B is correct - The opportunity cost of financial capital that has been invested in the business

The implicit cost is defined as the cost that has already faced by a company but not shown in the final expenses. It is the cost that has to be foregone by a company for paying its own asset rather than renting or buying it. It is opposite to the explicit cost which is paid directly to the factors of production for providing its services.