Economic Principles and Decision Making Question Answer 2022

Running head: ECONOMICS 1
Economic Principles and Decision Making
Name
Institution

ECONOMICS 2
Economic Principles and Decision Making
ANSWERS
Question 1
Quantity demanded is the total amount of goods and services that a consumer is able and
willing to purchase at a given time and price. An income of a consumer a significant determinant
of the demand for goods and services in the market. As a result, when an individual's income is
relatively low, i.e., increase of the income from $250 to $500 per week, an individual prefers to
increase the consumption of noodles than when the income level was $250. In the normal good
scenario, as the income of an individual increases, the demand for the same good also increases,
and a fall in income level also leads to a decrease in the demand for goods (Becker, 2017). As a
result, there will be a distribution effect due to an increase in the income level tha accelerate
consumption for the normal goods as shown in the figure below;

ECONOMICS 3
Figure 1.0: Shift in the demand curve due to a change in income
From the figure above, when the consumer's income was at $250, the quantity demanded
was at Q=50 and price at $5. However, since there was an increase in the income of the
consumer, the demand for noodles increased from Q=50 to Q=75 at a constant price level. It,
therefore, shows that other than a change in the price of goods, other factors, including change in
income level, will only shift the demand curve either to the right or to the left (Varian, 2014).
But since the consumer got employment, the wage rate will, therefore, increase, thus increase the
disposable income to a value higher than the initial one. It, therefore, shows that an increase in
the income of a consumer will lead to a rise in the consumption of noodles, given that it is a
normal good.
Question2
Production possibility frontier (PPF) is a curve that shows the maximum possible output
combination for two goods that an economy can effectively produce with available scarce
resources (Tyagi, 2013). To reallocate the limited resources set aside for the production of one
commodity to another good requires an opportunity cost principle where one has to forgo
production of good X to increase the production of good Y. Within the PPF, there is a
combination of output that a consumer is willing and able to produce with a given capital.
Outside the PPF, there is an unattainable output that only needs increased factors of production,
including the capital, labor, and technological advancement to attain (Kolmar & Hoffmann,
2018). As a result, using the two goods provided Roadsters per day and the Convertibles per day,
we can find the combination level to produce the goods and services as shown in figure 2.0
below;