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You may use any outside resources in order to complete it. Simply copying answers from any source, including the textbook or notes, will not be greeted with a high grade. Ignoring parts of a question is not an advisable strategy. The exam will be graded for the accuracy and precision of the economic and mathematical arguments and evidence provided.

1.Explain the producer’s problem using as much detail as possible. Your answer should include an explanation of the problem itself, how they solve it graphically, how price changes affect production decisions, and why prices provide incentives for producers. Use both straight line (individual) and bowed out (societal) PPFs to illustrate the idea. Feel free to incorporate graphs, drawings, and diagrams relevant to the problem. Use made up production capabilities and prices if you wish, too.

2.Explain the consumer’s problem in as much detail as possible. Your answer should include an explanation of the problem itself, brief description of ICs and their properties, how consumers become “happier,” how price or income changes can affect their purchasing decisions, and why every consumer solving their consumer problem individually creates a Pareto efficient outcome for society. Feel free to incorporate graphs, drawings, and diagrams relevant to the problem. Use made up income, prices, and happiness levels if you wish, too.

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School: Purdue University



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Question One
The Producer’s Problem
The producer’s problem is to produce the goods and services of the required or
anticipated proportions (Divine, 2000). Most of the consumers denote the number of goods and

services they want, the quality of the goods and services and the prices they are willing to pay for
the goods and services. As such a producer is faced with the challenge of providing the right
quantity and quality of the goods at the stated price.
How Price Changes Affect Production Decisions
Most of the producers rely on the demand and supply curves to comprehend the buying
behaviors of the customers. However, it is imperative to denote that the demand and supply
curves are not constant. The change in the production costs and the factors of production affect
the demand curves a fact that triggers the producers and the business leaders to alter their
resolutions regarding the pricing strategies (Divine, 2000). An increase in the price of a
particular commodity motivates the potential producers to enter the market. On the contrary, a
decline in the prices of a commodity would trigger the producers to make a resolution of leaving
the market. For instance, an increase in the price of phones would trigger the producers to enter
the market. On the contrary, if the prices of the phones decline, the producers would be triggered
to leave the market. The figure below depicts that the price change can result to a rationalizing
impact and it can create incentives for the producers.


Figure One ("Economics Online", n.d.)

Why Prices Provide Incentives for Producers
Incentives are denoted as the aspects that work towards motivating the consumers and the
producers to undertake a particular course of action or embrace a given behavior (Elwood, 2010).
Prices act as mechanisms for providing incentives to the producers. Ideally, this is because when
the price of a particular product is high, the producers are motivated to increase their supply
meaning that the profits and revenues can be increased.
During the start of the market, the demand in the market is equal to the supply in the
market meaning that the market is at equilibrium. However, an increase in the production costs
would result in the decline in supply meaning that there will be excess demand at the particular
price (Elwood, 2010). Such excess demand also pushes the price of a product higher. The new
price has an effect on extending supply and contracting demand. In the long run, the potential
corporations would be triggered to enter the market and the firms would be required to enhance


their production techniques. The graph below can be used to explore the rationing and inc...

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