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Kaanha likes to consume only two goods – butter and flutes. He earns an income of Rs 2000 per month which he entirely spends on consumption of the two goods. Price of a unit of butter is at Rs 40 and the price of a flute is at Rs 10. Kaanha currently optimally consumes 40 units of butter and 40 units of flutes. Now, price of both the goods have become equal at Rs 25. At optimal choice, how would the level of satisfaction of Kaanha be affected by this price change? Explain with the help of a diagram.
Explain the Law of Diminishing Marginal Utility. How does it have an implication over the Law of Demand?
(5 marks) Diya opens a cake shop in her locality. At the time, her cake shop is the only one in the locality and she manages to maximise her profits. After six months, several new cake shops are opened in the locality, each of which specialises in a cake of a different flavour. How does the entry of new cake shops affect Diya’s cake shop if she still aims to maximise profits? Explain your answer using a graph that shows the change.
How to shop keeper utilize the limited resources to fulfill her needs
Now a government subsidy program lowers the price of X from $20 per unit to $10 per unit.
(e) Calculate and graphically show the change in good X consumption resulting from the program.
(f) Graphically show the change in consumption attributable to the separate income and substitution effects.
(g) Show (graphically) how much the program cost the government.
Robinson's preferences between apples (a) and bananas (b) are expressed by the following:
U = (a+2)0.5(b+1)0.5
(a) Show that Robinson's indifference curves are negatively sloped.
(b) Are they convex to the origin? Explain
A person’s utility function is of the form U(x,y) = 5xy. The prices of good x and y are Px = $4 and Py = $2, respectively. The person’s income is $1200.
(a) Show that these preferences are homothetic?
(b) What quantities of x and y should the consumer purchase to maximize his
utility?
(c) Determine the person’s income offer curve (IOC). Draw it.
(d) Explain whether each of the two goods is normal or inferior.
(e) Derive the Engel curve for x. Draw it.
Neville's passion is fine wine. When the prices of all other goods are fixed at current levels, Neville's demand function for high-quality claret is Q = .02M – 2P, where M is his income, P is the price of claret (in British pounds), and Q is the number of bottles of claret that he demands. Neville's income is 7500 pounds, and the price of a bottle of suitable claret is 30 pounds.
(a) How many bottles of claret will Neville buy?
(b) If the price of claret rose to 40 pounds, how much income would Neville
have to have in order to be exactly able to afford the amount of claret and the amount of other goods that he bought before the price change?
(c) At the income level you mentioned in part (b) and the higher price of claret of 40 pounds, how many bottles would Neville buy?
(d) At the original income of 7500 pounds and a price of 40, how much claret would Neville demand?
(e) Decompose the total price effect into the substitution and income effect.
Do each of a-d, both geometrically (you need not be precise) and using calculus. There are only two goods; x is the quantity of one good and y of the other. Your income is I and u(x,y) = xy + x + y.
(a) Px = $2; Py = $1; I = $15. Suppose Py rises to $2. By how much must I increase in order that you be as well off as before?
(b) In the case described in part (a), assuming that I does not change, what quantities of each good are consumed before and after the price change? How much of each change is a substitution effect? How much is an income effect?
(c) Px = $2; I =$15. Graph the amount of Y you consume as a function of Py , for values of Py ranging from $0 to $10 (your ordinary demand curve for Y).
(d) With both prices equal to $1, show how consumption of each good varies as I changes from $0 to $100.
Robinson's preferences between apples (a) and bananas (b) are expressed by the following:
U = (a+2)0.5(b+1)0.5
(a) Show that Robinson's indifference curves are negatively sloped.
(b) Are they convex to the origin? Explain.
