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Utility Maximization and Budget Constraint Quiz

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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?

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

What does the budget constraint represent in utility maximization?

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

What is the first-order condition for profit maximization?

MRPK = r and MRPL = w 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?

The firm's hiring decision may have an effect on input prices 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 * MPK = r and P * MPL = w Signup and view all the answers

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

MRP = MR * MP Signup and view all the answers

What does individual labor supply (LS) express?

The willingness of individuals to accept paid work Signup and view all the answers

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

Each additional unit of production sold increases total cost more than total revenues (SMC>MR) Signup and view all the answers

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

SMC = MR Signup and view all the answers

What does the efficiency of perfect competition imply?

Allocative and productive efficiency are achieved Signup and view all the answers