Which of the following statements about the budget constraint is true? The slope of the budget constraint is:
(i) the rate at which a consumer can trade one good for another
(ii) equal to the slope of the highest indifference curve
(iii) constant
A)(i) only
B)(i) and (ii)
C)(ii) and (iii)
D)(i) and (iii)

Question

Quizplus · Accepted Answer

The slope of the budget constraint represents the rate at which a consumer can trade one good for another. This is because the slope is calculated as the ratio of the prices of the two goods.

The slope of the highest indifference curve (i.e. the marginal rate of substitution) does not necessarily equal the slope of the budget constraint. It only equals the slope of the budget constraint at the point where the consumer's optimal bundle (which maximizes utility given the budget constraint) is tangent to the budget line.

The budget constraint is also typically assumed to be linear, meaning the slope (and hence the ratio of prices) is constant.

Which of the Following Statements About the Budget Constraint Is