Business Economic Assessment 2022

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BUSINESS ECONOMICS ASSIGNMENT

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Contents
Question 1..................................................................................................................................3
Question 2..................................................................................................................................3
Question 3..................................................................................................................................3
Question 4..................................................................................................................................4
Question 5..................................................................................................................................4
Question 5..................................................................................................................................6
Question 6..................................................................................................................................7
Question 7..................................................................................................................................7
Question 8..................................................................................................................................8
Reference..................................................................................................................................11

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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:
0 500 1000 1500 2000 2500 3000 3500
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.

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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)