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IAI Actuarial Core Principles · Business Economics · Consumer demand and behaviour

Meera has a monthly budget of Rs 12,000 to spend on food (price Rs 200 per unit) and entertainment (price Rs 400 per visit). With food on the horizontal axis, what is the slope of her budget line in absolute value, and how many units of food must she give up for one more visit?

The slope of the budget line is 2, the price of entertainment divided by the price of food (400/200). Each extra visit costs Rs 400, so Meera must give up 2 units of food, which is the opportunity cost of a visit.

  1. A0.5; she gives up 0.5 units of food
  2. B2; she gives up 2 units of foodCorrect
  3. C30; she gives up 30 units of food
  4. D60; she gives up 60 units of food
  5. 2; she gives up 0.5 units of food

Explanation

With food on the horizontal axis, the slope is the price of entertainment divided by the price of food, 400/200 = 2. One more visit costs Rs 400, which equals 2 units of food at Rs 200 each. Option 0.5 inverts the price ratio, and 30 and 60 are the intercepts, not the slope.

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