When the good on the horizontal axis is a composite good, the slope of the budget constraint is minus the price of the good on the vertical axis.
Answer the following statement true (T) or false (F)
False
Rationale: The slope is usually -p1/p2 --- and when p1=1 (as it is when good 1 is a composite good), then the slope of the budget line is -1/p2; i.e. minus the inverse of p2.
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Analyze the following statement, and show what would happen in the long run if such advice were followed by the Fed: "The increase in the stock market has increased people's wealth
As a result, their consumption has increased, increasing aggregate demand and output. So the Fed needs to increase the money supply, since with higher income, people's demand for real money balances will be higher."
If two goods are substitutes, then a(n)
a. increase in the demand for one of them will cause its price to fall b. increase the supply of one of them will cause its price to rise c. increase in the price of one of them will cause the demand for the other to increase d. increase in the price of one of them will cause the supply of the other to increase e. decrease in the price of one of them will cause the demand for the other to increase