Question

MICROECONOMICS

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QUESTION 4 A budget line 1. will tangent to indifference curve at the optimal choice of good. 2. rotates when the price of goods change. 3. has a slope equal to a relative price. 4.rotates or shifts when the consumer's budget changes. 5. shows the limits to what can be consumed.

Answer 1

Ans) 1) A budget line shows the combination of goods that can be consumed given the limited income/money.

Option e.

2) Cross price elasticity is the responsiveness of quantity demanded of one product to change in price of another. If cross price elasticity is positive, goods are substitutes and if it is negative, goods are complementary.

Option b.

3) When price is above equilibrium price, there will be surplus or excess supply in the market. To clear the stock, sellers will reduce the price and equilibrium will be attained once again.

Option e.

4) Price elasticity of demand is the responsiveness of quantity demanded to change in price.

Elasticity = %change in quantity demanded/% change in price

Slope = change in price ÷ change in quantity

Option b, c, d and e