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Question : Statement 1: The slope of the budget line represents the relative price of two goods.

Statement 2: The consumer achieves equilibrium when the marginal rate of substitution is equal to the relative price of the goods.

Option 1: Statement 1 is true, and statement 2 is false.

Option 2: Statement 1 is false, and statement 2 is true.

Option 3: Both statement 1 and statement 2 are true.

Option 4: Both statement 1 and statement 2 are false.


Team Careers360 20th Jan, 2024
Answer (1)
Team Careers360 23rd Jan, 2024

Correct Answer: Both statement 1 and statement 2 are true.


Solution : The correct answer is (c) Option C: Both statement 1 and statement 2 are true.

Statement 1 is true. The slope of the budget line represents the relative price of two goods. It indicates the rate at which the consumer can trade one good for another in the market, given the prices of the goods.

Statement 2 is also true. The consumer achieves equilibrium when the marginal rate of substitution (MRS) is equal to the relative price of the goods. The MRS measures the rate at which the consumer is willing to substitute one good for another while remaining on the same level of utility. At equilibrium, the consumer maximizes their utility by allocating their budget in a way that the MRS equals the relative price of the goods.

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