Larry consumes only beer (B)and chips (C). If beer is measured on the vertical axis, the relative price of chips in terms of beer is all of the following except
A)PC/PB.
B)the magnitude of the slope of the budget line.
C)equal to the opportunity cost of 1 bag of chips.
D)the real income in terms of beer.
E)the inverse of the relative price of beer in terms of chips.

Question

Quizplus · Accepted Answer

The relative price of chips in terms of beer is given by the slope of the budget line, which is equal to -(PC/PB). Therefore, choice A is correct. The magnitude of the slope of the budget line is also equal to the relative price of chips in terms of beer, so choice B is correct. The opportunity cost of 1 bag of chips is given by the slope of the production possibilities frontier, and is not directly related to the relative price of chips in terms of beer, so choice C is incorrect. Real income in terms of beer is given by the budget line intercept on the vertical axis, and is not directly related to the relative price of chips in terms of beer, so choice D is incorrect. The inverse of the relative price of beer in terms of chips is equal to PB/PC, which is the reciprocal of PC/PB, so choice E is correct but not the answer to the question asked.

Larry Consumes Only Beer (B)and Chips (C)