In a Simple Circular-Flow Diagram, How Are Total Income and Total

question 29

Multiple Choice

In a simple circular-flow diagram, how are total income and total expenditure related?  

• A) They are seldom equal because of the dynamic changes that occur in an economy. 
• B) They are equal only when all goods and services produced are sold. 
• C) They are always equal because every transaction has a buyer and a seller. 
• D) They are always equal because of accounting rules.

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Definitions:

Marginal Rate of Substitution

The rate at which a consumer is willing to give up one good in exchange for another good while maintaining the same level of utility or satisfaction.

Perfect Substitutes

Two goods for which consumers are completely indifferent as to which to consume, meaning the consumption of one good can fully replace consumption of the other.

Perfect Complements

Goods that are often consumed together in fixed proportions, such that demand for one increases demand for the other.

Cardinal Utility Functions

Utilize numerical values to represent the level of satisfaction or utility that consumers derive from different bundles of goods and services.