3 Question 1 In the literature of consumer behaviour, preference is the order that consumer sets for different bundles of goods or the services. The preference ordering on the other hand is way that a consumer ranks each of the bundles of goods may be in terms of the utility or in terms of the quantity. The basket of goods or the service is a set of consumer product which contributes to the utility of the consumer as a whole (Trost, 2019). Question 2 a)Indifference map: 0500100015002000250030003500 0 20 40 60 80 100 120 140 IC2 IC 3 IC1 Coffee Ice cream Figure 1: The indifference curve map (Source: Developed by the learner) b)First and the foremost assumption is that each of the indifference curves is convex to the origin. Apart from that, assumption is also there that no two indifference curve can intersect each other. Question 3 a)The marginal rate of substitution of a particular good is denoted by the rate at which it can be substituted by another good while remaining on the same indifference curve.
4 That means if a customer wants to give up 21 units of ice creams to enjoy 100 units more of coffee, the marginal rate of substitution of coffee with 21/100. b)MRS is the rate at which the consumer is willing to give up one good in place of the other one. Now, when the consumer has big amount of some good the MRS is high and hence the slope of the indifference curve is steep. As the consumer tends of have fewer goods its MRS is low and hence the slope is low. Therefore MRS determines the slope of the indifference curve (Mankiw, 2020). The slope of the indifference curve reduces due to the diminishing marginal utility concept. Question 4 a) Diminishing MRS means as the quantity of a specific good reduces the consumer becomes less likely to substitute that good with any other good. This is because of the fact that, when the quantity of some good is high the marginal utility is low and hence substitution rate is high and vice versa (Kreps, 2019). This influences the shape of the indifference curve. b) Yes indifference curve which does not have diminishing MRS can be drawn when the goods are perfect substitute of each other such as ice cream and yoghurt. In that case the MRS is constant and hence indifference curves will be downward sloping straight lines. Question 5 a) MRS in the point A is= (-1)/1.5= -0.66. b)The point B is in the same indifference curve and hence this is neither better nor worse, consumer here is indifferent. c) The point C lies above the indifference curve and hence utility in point C is more than A,B or any other point on the given indifference curve. d)
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5 IC for substitute goods: 024681012 0 2 4 6 8 10 12 Indiference curve for substitute goods Indiference curve for substitute goods Good 1 Good 2 Figure 2: The indifference curve for substitute goods (Source: developed by the learner) IC for the complementary goods: 4.555.566.577.588.599.5 0 1 2 3 4 5 6 IC for complementary goods IC for complementary goods Good 1 Good 2 Figure 3: The IC for the complementary goods
6 (Source: Developed by the learner) Question 5 a) Budget line is a downward sloping line that includes all the possible combinations of goods and the services that can be bought with a given sum of money or budget. b) 00.511.522.533.5 0 0.5 1 1.5 2 2.5 Budget line Budget line Good 1 Good 2 Figure 4: The budget line (Source: Developed by the learner) c) Slope of the budget line= (-2/3)= -0.66. d) The price of the influences the slope of the budget line and the income effect results in the shift of the budget line. Now, if the price of one good increases, the consumer will be able to buy less of that goods even if none of the other good is bought, that means there will be a change in the slope of the budget line. From the example if the price of good 1 increase
7 intercept will reduce from 3. If the income of the consumer increases, the purchasing power of the consumer increases leading to a rightward shift in the budget line. Question 6 a) The process of attaining the highest level of utility subject to a limited resource is known as the utility maximisation. b) The criterion for the maximisation of the utility is =MUx/Px = MUy/Py where MUx and MUy are the marginal utilities of different goods and Px, Py are the prices of the different goods. Question 7 a) Perfect competition means a market structure where the competition between the rivals in terms of the goods or the services is high. The assumptions for the perfect competition are that the products are exactly identical to each other. Another important assumption is that the information is freely available in the market in case of perfect competition. b) The demand curve facing individual firms in the perfect competition is horizontal due the presence of the large number of sellers and buyers in the market. If any individual seller charges more than the equilibrium price, the number of buyer demanding the product will immediately reduce to 0, hence the demand curve is horizontal (Browning & Zupan, 2020). c) This is due to the fact that price in the perfectly competitive market is constant and determined by the forces supply and the demand of the market. Therefore, when sales increase, the revenue of the individual firm increases exactly by the amount of the price that further is the marginal revenue of the firm.
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8 Question 8 a) 020406080100120 0 50 100 150 200 250 300 TC TC Quantity Total cost Figure 5: The total cost curve (Source: Developed by the learner) b) 020406080100120 0 50 100 150 200 250 300 TC TR Quantity Total cost Figure 6: The total revenue curve (Source: Developed by the learner)
9 Due to the constant price the total revenue curve will be a linear upward sloping curve. c) 020406080100120 0 50 100 150 200 250 300 TC TR MC MR AVC Quantity Total cost Figure 7: The MC, MR and AVC curves (Source: Developed by the learner) At the point where AVC is equal to the MC is the point where the AVC reaches the minimum point. The easiest point to find is the marginal cost of the first unit of the production. MC will be more than AVC where the production is still to push down the AVC of the production. Beyond that MC rises more than the AVC and hence is below the MC. d) The firm maximises the profit in the graph where the difference between the TR and the TC is the highest and it has been shown in black colour in the graph below.
10 Figure 8: The maximisation of the profit (Source: Developed by the learner) e) The first way to find the profits is by taking the subtraction of the Total revenue and the total cost of the company. The other way to get the profit is by equating the marginal cost to the marginal product of the production. In this case the profit is large and it is super normal profit. f) Firm’s short run supply curve can be found from the graph and it is the marginal cost of the production. The green curve shown in the above diagram is the firms supply curve in the short run.
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11 Reference Browning, E. K., & Zupan, M. A. (2020).Microeconomics: Theory and Applications. John Wiley & Sons. Kreps, D. M. (2019).Microeconomics for managers. Princeton University Press. Mankiw, N. G. (2020).Principles of microeconomics. Cengage Learning. Trost, B. (2019). Essays in Applied Microeconomics: Topics in Urban and Education Economics.