Microeconomics Answers

Suppose Pilu and Nilu have a cake, which they need to divide among themselves. The rules are as follows:

• Pilu will propose a split, for example, she can offer a 12/88 split which means she gets 12% and Nilu gets 88% of the cake.
• Nilu decides if the split is acceptable or not. If she agrees the cake is split otherwise it Is thrown away and nobody gets anything
• a) Find the Nash equilibrium of the game.
• b) What would happen if Nilu did not have the choice to reject and had to accept the offer of Pilu? 
• c) Would the outcome be any different if the game were to be repeated 5 times? Explain 

A famous university in South Delhi is composed of a large poor class and a minority wealthy class of students. Each student in this university buys only two goods: new economic books and used economics books.

For each poor consumer, the income effect of a change in the price of used books reinforces the substitution effect – both are in the same direction. For each wealthy consumer, the income effect opposes and outweighs the substitution effects.

a) Think about what could cause the income effects of the two classes to be different. Explain

b) Illustrate graphically the effect of a decrease in the price of used books on an individual’s consumption in each class (poorer and wealthier students). Label the substitution and income effects for used books. 

3. Ketchup is a complement for hot dogs. If the price of hot dogs rises, what happens to the market for ketchup? For tomatoes? For tomato juice? For orange juice? [Hint: four market diagrams are to be drawn]

5. Venkatesh is a student at JGU. He has a monthly budget of Rs. 2500 to spend on either samosas, which cost Rs. 50 each, or aloo-tikki burgers, which cost Rs. 30 each.

(a): Indicate which combinations would leave some budget unspent. a) those to the left of the line in the above graph b) those to the right of the line in the above graph

(b): What is the equation for Venkatesh’s budget constraint? In your equation, use q1 as the variable to represent the quantity of samosas and q2 to represent the quantity of aloo-tikki burgers.

(c): What is the opportunity cost of a samosa?

(d). What is the opportunity cost of an aloo-tikki burger?

(e): How can one see the opportunity cost of samosa on the graph? Show it in your diagram. 

5. Venkatesh is a student at JGU. He has a monthly budget of Rs. 2500 to spend on either samosas, which cost Rs. 50 each, or aloo-tikki burgers, which cost Rs. 30 each.

5a. What is the largest number of samosas that Venkatesh could afford to purchase in one month?

5b. What is the largest number of aloo-tikki burgers Venkatesh could afford to purchase in one month?

5c. Draw Venkatesh’s budget constraint. Put samosas on the x-axis and aloo-tikki burgers on the y-axis.

5d. Which combinations of samosas and aloo-tikki burgers are unaffordable? (choose 1 answer) a) Those to the left of the line in 5c. b) Those to the right of the line in 5c.

diagram. 

Suppose a soap-manufacturing production process is described by the following 

equation:

Y = a + b log K + с log L

Where, 

Y= Output (number of soaps produced)

K=Capital 

L=Labor

a, b and c are constants

Suppose 0<a<1, 0< b<1 

a. Find the Marginal Product of Labor (MPL) and Marginal Product of Capital (MPK)

in the production of soap

b. Is MPL diminishing, increasing or constant as L increases?

c. Is MPK diminishing, increasing or constant as K increases?

 Suppose the price ratio of two goods is 3/4 and Shubman has a budget of $100. If his budget increases to $150 and the prices of the two goods stay the same, what is the new price ratio?