Q10 of 25 Page 1

Suppose a consumer whose budget is <500, wants to consume only two goods, Good X and Good Y. The goods are respectively priced at <50 and <25.

Answer the following questions based on the given information :


(a) State the budget equation of the consumer.


(b) What is the slope of the budget line?


(c) How many units can she purchase if she spends the entire <500 on Good X?


(d) How many units can she purchase if she spends the entire <500on Good Y, given that the price of good Y has doubled?


OR


‘‘For a consumer to be in equilibrium position, marginal rate of substitution between the two goods must be equal to the ratio of prices of


the two goods.'' Do you agree with the given statement? Justify your answer.


(a) let the two goods be X and Y


Price of X=50


Price of Y=25


Total Income=1250


50x+25y=1250


2x+Y=50


(b) the slope of the budget line


2x+Y=50


The goods willing to sacrifice by X/by Y = -2/1=-2


(c) If she spends the entire 500 on good X the consumption of Y would be 0.


So, 2x+(0)=50


X=25


(d) If she spends the entire amount on good Y, then


2(0)+Y=50


Y=50


But since the price has been doubled 50/2=25


OR


Marginal rate of substitution is the rate at which the consumer readily gives up one commodity for an extra unit of another commodity.


Condition to be in equilibrium:


Marginal utility of product x / Price of x = Marginal utility of y/Price of y


i.e. MUx/Px= MUy/Py


or Px/Py= MUy/MUx


this shows that consumer to be in the equilibrium position, marginal rate of


substitution between the two goods must be equal to the ratio of prices of


the two goods.


More from this chapter

All 25 →
8

The price of commodity increases from <10 to <14. Calculatepercentage fall in quantity demanded of the commodity if the coefficient of price elasticity of demand is (–) 1 �25.

OR


State whether the following statements are true or false. Give valid reasons in support of your answer.


(a) The coefficient of price elasticity of demand for the commodity is inversely related to the number of alternative uses of the commodity.


(b) Luxury goods often have a lower price elasticity of demand.


 9

Discuss briefly the meaning of ‘‘Price discrimination’’ and ‘‘Product differentiation’’ with the help of suitable examples.

OR


Is a firm under perfect competition a price taker, or a price maker?Justify your answer.


 11

(a) Identify the market form and explain the corresponding feature, as given in the following statement: ‘The commodity in this market has attributes which are identical for sellers and buyers.’’

(b) Define Price Floor. State the likely consequence of this type of intervention by the government.


 12

(a) Why is the short run Marginal Cost curve U-shaped ?

(b) Explain the relation between Average Cost (AC) curve and Marginal Cost (MC) curve using the diagram.