Utility Maximization and Budget Constraint Quiz
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Questions and Answers

What does the marginal rate of substitution (MRS) represent?

  • The total utility derived from consuming an additional unit of a good
  • The percentage change in income spent on goods X and Y
  • The ratio of prices between two goods
  • The rate at which a consumer is willing to trade one good for another (correct)

    • What is a 'corner solution' in utility maximization?

  • A situation where an individual spends all income on both goods equally
  • A situation where an individual maximizes utility by consuming only one of the goods (correct)
  • A situation where an individual's preferences cannot be represented by indifference curves
  • A situation where the budget constraint intersects at a corner of the graph

    • What is the condition for utility maximization at a given point?

  • The individual spends all available income on a single good
  • The marginal rate of substitution is always equal to one
  • The quantity of X equals the quantity of Y
  • The slope of the budget constraint equals the slope of the indifference curve (correct)

    • What does the tangency condition in utility maximization refer to?

    <p>Equating the ratios of marginal utility to price for every good consumed</p> Signup and view all the answers

    What does the budget constraint represent in utility maximization?

    <p>The limit on consumption imposed by an individual's income and the prices of goods</p> Signup and view all the answers

    What is the first-order condition for profit maximization?

    <p>MRPK = r and MRPL = w</p> Signup and view all the answers

    What happens if the supply curve facing the firm for the inputs it hires is not infinitely elastic at prevailing prices?

    <p>The firm's hiring decision may have an effect on input prices</p> Signup and view all the answers

    In a price-taking behavior in the output market, what is true about the profit-maximizing levels of each input?

    <p>P * MPK = r and P * MPL = w</p> Signup and view all the answers

    What is the marginal revenue product (MRP) from hiring an extra unit of any input?

    <p>MRP = MR * MP</p> Signup and view all the answers

    What does individual labor supply (LS) express?

    <p>The willingness of individuals to accept paid work</p> Signup and view all the answers

    What is the golden rule of profit maximization for a perfectly competitive firm?

    <p>Each additional unit of production sold increases total cost more than total revenues (SMC&gt;MR)</p> Signup and view all the answers

    What is the condition for profit maximization for a perfectly competitive firm in the short/long run?

    <p>SMC = MR</p> Signup and view all the answers

    What does the efficiency of perfect competition imply?

    <p>Allocative and productive efficiency are achieved</p> Signup and view all the answers

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