1)The Latin term “ceteris paribus” means
a.Prosperity inevitably follows recession.
b.That economics deals with facts, not values.
c.That if event A precedes event B, A has caused B.
d.Other things equal.
2) The budget line shows
a.All possible combinations of two goods that yield the same level of utility to the consumer.
b.All possible combinations of two goods that can be purchased, given money income and the prices of the goods.
c.The minimum amount of two goods that a consumer can purchase with a specific money income.
d.The amount of product X that a consumer is willing to give up to obtain one more unit of product Y.
The Correct Answer and Explanation is :
Correct Answers:
- d. Other things equal.
- b. All possible combinations of two goods that can be purchased, given money income and the prices of the goods.
Explanation:
1. The Latin term “ceteris paribus” means “other things equal.”
The term “ceteris paribus” is commonly used in economics to simplify the analysis of cause-and-effect relationships. It means that while focusing on the impact of one variable, all other variables are assumed to remain constant. This assumption helps economists isolate the relationship between specific variables without interference from other factors. For example, if we want to study the effect of price on the demand for a good, “ceteris paribus” allows us to assume that factors like consumer income, preferences, and prices of related goods remain unchanged.
Without the “ceteris paribus” assumption, it would be difficult to analyze economic scenarios because real-world phenomena involve multiple variables interacting simultaneously. Therefore, this term provides a crucial foundation for theoretical models and helps clarify the underlying principles of economics.
2. The budget line shows “all possible combinations of two goods that can be purchased, given money income and the prices of the goods.”
A budget line represents the constraints faced by a consumer in allocating their income between two goods. It is derived from the consumer’s income and the prices of the two goods. The equation for the budget line is:
[
P_xX + P_yY = I
]
Where:
- (P_x) and (P_y) are the prices of goods (X) and (Y),
- (X) and (Y) are the quantities of the two goods, and
- (I) is the consumer’s income.
The budget line’s slope reflects the trade-off between the two goods, representing the relative price ratio ((-P_x / P_y)). It illustrates how many units of one good a consumer must give up to purchase more of the other, within the limits of their income. Points on the line represent efficient spending combinations, while points inside the line indicate unspent income, and points outside the line are unaffordable. Thus, the budget line serves as a visual representation of the consumer’s economic choices.