Business Economics Assignment - Microeconomics Analysis

This business economics assignment delves into core microeconomic concepts, starting with consumer behavior and preferences. It explains the concepts of preference, preference order, and the basket of goods. The assignment then explores indifference curves, including their properties and the concept of the marginal rate of substitution (MRS). It examines the implications of diminishing MRS and provides graphical representations. Further, the solution covers budget lines, utility maximization, and market structures, particularly perfect competition. It analyzes demand curves, revenue curves, and cost curves within a perfectly competitive market. The assignment concludes by illustrating profit maximization and exploring short-run supply curves. The solution is comprehensive, including diagrams and calculations to illustrate the concepts discussed.

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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)

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IC for substitute goods:
0 2 4 6 8 10 12
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:
4.5 5 5.5 6 6.5 7 7.5 8 8.5 9 9.5
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

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(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)
0 0.5 1 1.5 2 2.5 3 3.5
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

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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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Question 8
a)
0 20 40 60 80 100 120
0
50
100
150
200
250
300
TC
TC
Quantity
Total cost
Figure 5: The total cost curve
(Source: Developed by the learner)
b)
0 20 40 60 80 100 120
0
50
100
150
200
250
300
TC
TR
Quantity
Total cost
Figure 6: The total revenue curve
(Source: Developed by the learner)

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Due to the constant price the total revenue curve will be a linear upward sloping curve.
c)
0 20 40 60 80 100 120
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.

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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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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.