he slope of the budget line is equal to the ratio of: a. marginal utilities. b.

Question

he slope of the budget line is equal to the ratio of: a. marginal utilities. b. money income to the price of the good on the horizontal axis. c. money income to the price of the good on the vertical axis. d. price of the good on the horizontal axis to the price of the good on the vertical axis. Consumer equilibrium occurs at: a. any point of intersection between the budget line and an indifference curve. b. a point of tangency between the budget line and an indifference curve. c. the point where the slope of the indifference curve equals the ratio of the quantities. d. a point where the budget line cuts the curve from below

Explanation / Answer

1. Ans: Price of the good on the horizontal axis to the price of the good on the vertical axis.

Explanation:

The slope of the budget line Budget Line is equal to the ratio of prices of two goods. Thus, option [d] is the correct answer.

2. Ans: a point of tangency between the budget line and indifference curve.

Explanation:

At the tangency point the slope of the budget line and the slope of indifference curve are equal. The budget line indicates the ratio between the prices of two goods (PX / PY) and the Slope of the indifference curve shows the marginal rate of substitution of good X for good Y. So, at the equilibrium point

MRSXY = PX / PY

Thus, we conclude that the point of tangency between the budget line and an indifference curve represents optimal consumption which maximizes consumer's utility.

Thus, option [b] is the correct answer.

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