logo

ECON1268- The Indifference Curve | Price Theory

7 Pages966 Words98 Views
   

Royal Melbourne Institute of Technology

   

Price Theory (ECON1268)

   

Added on  2020-03-13

About This Document

The theory of price is an economic theory that states that the price for any specific good or service is based on the relationship between its supply and demand. The below document discusses various questions related to the price theory.

ECON1268- The Indifference Curve | Price Theory

   

Royal Melbourne Institute of Technology

   

Price Theory (ECON1268)

   Added on 2020-03-13

ShareRelated Documents
Running head: PRICE THEORY1Price TheoryProfessor’s Name:Name:Date:
ECON1268- The Indifference Curve | Price Theory_1
PRICE THEORY2Question 1An optimum basket must lie on the indifference curve that just touches, but does not cross the budget line. This means that is at the point at which the budget line is a tangent to the indifference curve. Two conditions must be satisfied by the optimal basket: 1.The marginal rate of substitution must be equal to the ratio of the prices i.e.MRSx,y=PxPy implying that MUxMUy=PxPy2.The basket must satisfy the budget line with an equality i.e. Pxx+Pyy=IIn this case, we test if the given basket meets the conditions for optimal basket.MUx=20√xMUy=1I=$200Px=$4Py=$1x=25y=50MUxMUy=PxPy20√251=$4$1205=44=4The marginal rate of substitution is equal to the price ratios hence basket satisfies the first condition. Next we test for the second condition.Pxx+Pyy=I$4(25)+$1(50)=$200$100+$50=$200$150=$200; Which is not true hence this basket does not satisfy the budget constrain with equality.The basket is not an optimal basket because it doesn’t satisfy the budget constraint with equality despite meeting the condition of marginal rate of substitution being equal to the price ratio of goods.Question 2MRSx,y=MUxMUy
ECON1268- The Indifference Curve | Price Theory_2
PRICE THEORY3MUxMUy=(20√x)1¿20√xQuestion 3For an optimal basket, MRSx,y=PxPy20√x=$4$1We solve for x to get the number of coffee cups in the optimal basket.$4√x=$20√x=5x=25Next, we substitute this value of x into the budget constraint equation for the optimal basket and solve for y to find the liters of milk in the optimal basket.Pxx+Pyy=I$4(25)+$1(y)=$200100+y=200y=200−100y=100Thus, the optimal basket contains 25 cups of coffee (x) and 100 liters of milk (y).Question 4For an optimal basket, MRSx,y=PxPy20√x=$5$1We solve for x to get the number of coffee cups in the new optimal basket.
ECON1268- The Indifference Curve | Price Theory_3

End of preview

Want to access all the pages? Upload your documents or become a member.

Related Documents
Assignment on Price Theory
|7
|804
|183

Microeconomic- Assignment
|9
|1427
|70

Consumer Utility Maximization and Monopolistic Competition
|17
|4089
|55

Production of Goods and Services (PDF)
|8
|1979
|489

Assignment On Number Of Restrictions On The Amount Of Lime
|9
|2184
|13

Principles of Economics
|16
|4105
|346