Question

When the indifference curve with Good A on the vertical axis and Good B on the horizontal axis is tangential to the budget line, then at that point, the marginal rate of substitution of Good A for Good B is equal to the ratio of the price of Good A and Good B (P_A/P_B)

True

False

The rate at which one input can be exchanged for another input without altering the level of output is called the

Marginal product curve

Average product curve

Marginal rate of technical substitution

Law if diminishing marginal productivity

A consumer with a given income will maximize their utility when

The total utility derived from each commodity consumed is equal

The marginal utility derived from each product is zero

The marginal utility derived from each commodity consumed are proportional to their prices

The marginal utility derived from each commodity is equal

If total utility obtained from consuming a given good is maximized, then marginal utility will be approaching zero

True

False

A budget line shows combination of two goods that can be purchased with given a income and prices of those goods

True

False

All of the following are properties of indifference curves except

Higher indifference curves are preferred to lower ones

Indifference curves do not cross

Indifference curves are bowed outward

None of the above

If two bundles of good satisfy a consumer equally well, the consumer is said to be

On her/his budget constraint

Indifferent between the bundles

In an equilibrium position

Optimally satisfied

The costs incurred even when no output is produced are called

Fixed costs

Variable costs

Marginal costs

Average costs

Answer 1

1. When the indifference curve with Good A on the vertical axis and Good b on the horizontal axis is tangential to the budget line, then at that point, the marginal rate of substitution of Good A for Good B is equal to the ratio of the Price of Good A and Good B (PA/PB).

ANSWER: TRUE

Explanation- Indifference curve is tangent to budget line when the slopes of the two are equal.

Slope of budget line is the Price Ratio (Price of X/ Price of Y).

Slope of indifference curve is Marginal Rate of Substitution, the rate at which consumer is willing to trade one good for another. Hence, at equilibrium, MRS = Price Ratio.

2. The rate at which one input can be exchanged for another input without altering the level of output is called the Marginal Rate of Technical Substitution.

Explanation- It is the rate at which one factor must decrease so that same level of productivity can be maintained when another factor is increased. The MRTS reflects give abd take between factors, such as capital and labour, that allows a firm to maintain constant output.

3. A consumer with a given income will maximise their utility when the marginal utilty derived from each commodity consumed are proportional to their prices. (MUx/ Px = MUy/Py )

Explanation- The consumer is said to be in equilibrium when the ratio of marginal utilities of both the goods to their prices becomes equal to utility of a rupee.

4. If Total Utility obtained from consuming a given good is maximised, then Marginal Utility will be approaching 0.

ANSWER : TRUE

Explanation- It is based upon the law of diminishing marginal utility which says “As more and more units of a good are consumed, MU i.e level of satisfaction derived from each successive unit goes on falling.” When Total Utility is maximum, MU becomes 0.

5. A budget line shows combination of 2 goods that can be purchased with given income and prices of those goods.

ANSWER: TRUE

Explanation- It is the graphical depiction of the various combinations of two selected products that a consumer can affors at specified prices for the products given at their particular income level.

6. All of the following are properties of indifference curves except – Indifference curve are bowed outward.

Explanation- As the consumer substititutes commodity X for commodity Y, the marginal rate of substitution decreases. Thus, indifference curve is convex to origin or bowes inward.

7. If two bundles of goods satisfy a consumer equally well, the consumer is said to be indifferent between the bundles.

Explanation- Suppose a consumer is asked to choose between the following 2 combinations- a) 4 apples and 2 oranges b) 2 apples and 3 oranges. He may prefer a to b or b to a, or he may like both combinations equally. In the last case we say that he is indifferent between them. It isn’t necessary at this stage to know how much utility is obtained from an apple or orange> The consumer can compare relative desirability between them, without knowing the exact amount of utility obtained from each combination.

8. The costs incurred even when no output is produced are called Fixed Costs.

Explanation- A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. It is an operating expense of business that cannot be avoided, such as rent payment. The rent on a building won’t change until the lease runs out, irrespective of level of business activity within that business. Other examples include interest, salaries.