Question Bank - General Knowledge

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A consumer's optimal bundle is located at the point of tangency between the budget line and ______ .

A.
indifference curve
B.
law of demand
C.
income effect
D.
monotonicity

Solution:

The correct answer is indifference curve.The optimum bundle of the consumer is located at the point where the budget line is tangent to one of the indifference curves.The indifference curve is a geometrical device developed by J.R. Hicks and R.G.D. Allen in the article ‚¬Å“A Reconsideration of the Theory of Value‚¬.An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent.An indifference schedule is a table which represents various combinations of two goods, which yield equal satisfaction to the consumer. The graphical presentation of the Indifference schedule is known as the Indifference curve. Along the curve, the consumer has an equal preference for the combinations of goods shown‚¬i.e. is indifferent about any combination of goods on the curve.Typically, indifference curves are shown convex to the origin, and no two indifference curves ever intersect.A diagram showing different indifference curves corresponding to different indifference schedules of the consumer is an indifference map. In other words, a set or family of indifference curves is an indifference map. Additional InformationLaw of DemandAccording to the law of demand????when the price of a commodity increase, the quantity demanded decreaseswhen the price of a commodity decreases, its the quantity demanded increaseskeeping other factors remains the same.The consumers demand for goods must be inversely related to the price of the good.There is an inverse relationship between price and demand and due to this the demand curve always has a downward slope.The demand curve is the relation between the quantity of the good chosen by a consumer and the price of the good.?Assumptions for the Law of Demand??No change in the income of consumers No change is the taste and preference of the consumers No change in price related to other goods.

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