8 urgent questions about MICROECONOMICS

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Puvpxra1997

Economics

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8 urgent questions about microeconomics. requires solving. please do not bid if you don't understand this

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Running head: 8 MICROECONOMIC QUESTIONS, SOLUTION

8 MICROECONOMIC QUESTIONS, SOLUTION
Name:
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Date:

1

8 MICROECONOMIC QUESTIONS, SOLUTION

2

8 MICROECONOMIC QUESTIONS, SOLUTION
QUESTION 2 (LABELLED CHOSE ONE OF TWO)
The following abbreviations are used in this question:
QC =Quantity of Coffee
QT=Quantity of Tea
UC = Utility for Coffee
UT =Utility for Tea
MUC =Marginal Utility for Coffee
MUT =Marginal Utility for Tea
MRS = Marginal Rate of Substitution of Coffee by Tea
The following formulae were used
MUC = Change in UC/Change in QC
MUT = Change in UT/Change in QT
MRS =MUC/MUT
QC
0
1
2
3
4

QT
30
28
26
24
22

UC
100
160
204
244
280

MUC
60
44
40
36

UT
1000
980
952
912
860

MUT
10
14
20
24

1) A consumer will spend a maximum of his or her income.
I =PC(C) +PT(T)
60=4C +2T

MRS
6.00
3.14
2.00
1.50

8 MICROECONOMIC QUESTIONS, SOLUTION

3

Coffee (C)
15
Budget curve

Tea (T)
30
As illustrated, when only coffee is consumed, C =60/4 =15
Also, when only tea is consumed, T=60/2= 30

2) The equilibrium will be at the point where MUC =2 MUT. In other words, the
MRS = 2. This is because, the price of coffee is twice that of Tea. From the table, When
MUC =2MUT, T= 24 and C =3. The point can be indicated on the graph as below.
Coffee (C)

15

Budget curve

3
Tea (T)
24

30

8 MICROECONOMIC QUESTIONS, SOLUTION

4

3)
Coffee (C)
15
Budget curve 1
7.5

Budget curve 2
Tea (T)
30

As illustrated, when only coffee is consumed, C =60/8 =7.5
Also, when only tea is consumed, T=60/2= 30

(PART LABELLED FIGURE A)
(A) First, a decrease in pricing will lead to an increase in the quantity purchased
because the consumer will afford more. Graph B indicate decrease in pricing of X only
because the quantity of X as increased due to rightward shift along x-axis with no effect
along Y-axis.

(B) First, an increase in pricing will lead to a decrease in the quantity purchased
because the consumer will afford less. Graph C indicate increase in pricing of Y only
because the quantity of Y has decreased due to downward shift along Y-axis with no
effect along X-axis.

8 MICROECONOMIC QUESTIONS, SOLUTION

5

(C) First, a decrease in pricing will lead to an increase in the quantity purchased
because the consumer will afford more. If the price of both goods decrease, the budget
line will shift to the right on both y and x axes. There is no graph that illustrates decrease
in pricing for both X and Y as in all graphs, only one part shifts.

(PART LABELLED FIGURE B)

(A) The consumer will be able to spend a maximum of his income. In this case, the
income is $40. Therefore, he can by a maximum of 20 bags (40/2) of either good because
the price for either bag is $2. The budget curve will be that with axes intercepts of 20 and
Bundle C will be the optimum bundle as the budget line forms a tangent with the
indifference curve.

(B) The decrease in price will lead to an increase in quantity demanded as the
consumer will afford more. Because the price of marshmallows has decreased, the
possible maximum consumption will increase to 20. The curve will shift only on the Y axis.
The optimal consumption will be at point B.

(C) The consumer will...


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