Q12 of 24 Page 1

Suppose the value of demand and supply curves of a Commodity-X is given by the following two equations simultaneously: Qd = 200 –10p Qs = 50 + 15p

i) Find the equilibrium price and equilibrium quantity of commodity X.


ii) Suppose that the price of a factor inputs used in producing the commodity has changed, resulting in the new supply curve given by the equation Qs’ = 100 + 15p Analyse the new equilibrium price and new equilibrium quantity as against the original equilibrium price and equilibrium quantity


The market is in equilibrium when quantity demanded equals quantity supplied.


200-10p = 50+15p


25p = 150


P = 6


Qd = 200 – (10*6)


= 200 – 60


= 40 = Qs


.


ii) The market is in equilibrium when quantity demanded equals quantity supplied.


200-10p = 100+15p


25p = 100


P = 4


Qd = 200 – (10*4)


= 200 – 40


= 60 = Qs


When the price of the factor input changes, the equilibrium quantity has increased from 40 to 60 and the equilibrium price has reduced from 6 to 4. Thus there has been a reduction in the price of the factor input resulting in the changes in the quantity demanded and supplied.


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10

a) A consumer, Mr Aman is in the state of equilibrium consuming two goods X and Y, with given prices Px and Py. What will happen if MUx/Px>MUy/Py?

b) Identify which of the following is not true for the Indifference Curves theory. Give valid reasons for the choice of your answer:


i. Lower indifference curve represents a lower level of satisfaction.


ii. Two indifference curves can intersect each other.


iii. Indifference curve must be convex to the origin at the point of tangency with the budget line at the consumer's equilibrium.


iv. Indifference curves are drawn under the ordinal approach to consumer equilibrium.


OR


A consumer has total money income of 500 to be spent on two goods X and Y with prices of 50 and 10 per unit respectively. On the basis of the given information, answer the following questions:


a. Give the equation of the budget line for the consumer.


b. What is the value of the slope of the budget line?


c. How many units can the consumer buy if he is to spend all his money income on good X?


d. How does the budget line change if there is a 50% fall in the price of good Y?

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b) What is Average Fixed Cost of a firm? Why is an Average Fixed Cost Curve a rectangular Hyperbola? Explain with help of a diagram.

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