In the graph, check the tangency condition at E. P₁ = ₹5, P₂ = ₹10. What must the MRS be at E? A budget line from 10 units of good 2 to 20 units of good 1, and three indifference curves IC₁, IC₂, IC₃, each convex to the origin and higher than the last. IC₂ just touches the budget line at E (10 units of good 1, 5 of good 2). IC₁ cuts the budget line twice; IC₃ lies entirely beyond it.

In the graph, check the tangency condition…

In the graph, check the tangency condition at E.

Question 62

HardOriginal question

In the graph, check the tangency condition at E. P₁ = ₹5, P₂ = ₹10. What must the MRS be at E?

A budget line from 10 units of good 2 to 20 units of good 1, and three indifference curves IC₁, IC₂, IC₃, each convex to the origin and higher than the last. IC₂ just touches the budget line at E (10 units of good 1, 5 of good 2). IC₁ cuts the budget line twice; IC₃ lies entirely beyond it.

2 units of good 2 per unit of good 1Correct answerYour answer5 units of good 2 per unit of good 1Correct answerYour answer0.5 unit of good 2 per unit of good 1Correct answerYour answer10 units of good 2 per unit of good 1Correct answerYour answer

Show the answer and explanation

CorrectNot quiteAnswer C

Correct answer: C

At the optimum, MRS = P₁ ÷ P₂ = 5 ÷ 10 = 0.5.
This also equals the size of the budget line's slope: 10 ÷ 20.

Concept: MRS at the optimum
Typical timeTypical: 100 s
Your timeYours: —

The rule this testsThe consumer's optimal choice

Practise this chapter →

Ten questions from Budget Line & Optimal Choice, at your own pace.

Practise this chapter →

Ten questions from Budget Line & Optimal Choice, at your own pace.

In the graph, check the tangency condition at E.

Question 62

Explanation