Questions and Answers on Labour Supply, Firm Productions and Normal and Inferior Goods

QUESTIONS AND
ANSWERS ON LABOUR
SUPPLY, FIRM
PRODUCTIONS AND
NORMAL AND INFERIOR
GOOD

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Question 1........................................................................................................................................3
Equation of Budget Constraint and its representation.................................................................3
Consumption-Leisure Diagram and MRS...................................................................................4
Income-Substitution effects.........................................................................................................5
Question 2........................................................................................................................................6
Use of f (K, L) model..................................................................................................................6
Question 3......................................................................................................................................10
Consumption of Tea..................................................................................................................10
Consumption of Coffee..............................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES................................................................................................................................1

INTRODUCTION
Economics and various concepts associated with it are extremely important in analysing
the current and future trends thus giving a better view point. In the present report, concepts such
as Budget Constraints, Indifference curve, Production function, and Income Substitution effect
will be analysed with respect to different questions that have been raised in the case study and
the answers will be supported by appropriate charts, figures and concepts thus giving reasonable
answers and conclusions.
MAIN BODY
Question 1
Equation of Budget Constraint and its representation
The concept of budget constraint helps in determining that what is the maximum budget
line or amount of an individual consumer that he is willing to spend in order to consume a
combination of goods or services within the given amount (Miller, Bergtold and Featherstone,
2019). A preference map along with budget constraint is used to analyse that what will be the
preference of the consumer amongst various goods and services that are available as options for
the consumer.
In the present case, for Ann, the budget constraint along with income leisure diagram can
be devised in following manner:
If Ann does not work for a single hour and allocate all her time to leisure, then for 24 hours, she
will not work and consume £ 50. However, if she works for all the hours without taking any rest,
then her consumption would be £ 10 * 24 hours + £ 50 i.e. a total of £ 290.
Thus the budget constraint of Ann can be developed as follows:

It can therefore be concluded that if Ann works for entire 24 hours in a day incessantly, then she
will be able to spend as much as £ 290 and if she does not work for a single hour and rest for the
entire day, then the maximum amount that she can spend is £ 50 which is her non labour income.
Consumption-Leisure Diagram and MRS
Indifference curve helps in determining different combination of goods that will give the
consumer an equal level of satisfaction (Chiappori, 2016). MRS i.e. Marginal Rate of Substituion
shows the rate at which a consumer is willing to give up certain quantity of one good for
replacing it with another good. In accordance with the budget line formulate above, it can be
stated that the indifference curve of Ann between working and leisure hours would be:
“A” can be termed as the indifference point i.e. these will be the adequate number of
hours for Ann as she will be able to earn adequate earnings to spend in a given number of hours
24 Hours of leisure
£50
£290
Consumption
Amount
Ann’s Daily Budget Line
24 Hours of leisure
£50
£290
Consumption
Amount
IC1
A
IC2
IC3
IC4