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BUSINESS ECONOMICS ASSINGMENT Nmims

The document discusses three economics concepts: 1) Indifference curves, which represent combinations of goods that provide the same level of utility. Indifference curves have negative slopes and are convex. 2) Price elasticity of demand is calculated using the formula: percentage change in quantity divided by percentage change in price, multiplied by price over original quantity. 3) Marginal utility is the change in total utility from consuming an additional unit of a good, while average utility is total utility divided by quantity consumed. Both concepts are illustrated in a table.

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Shreyansh Jain
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34 views4 pages

BUSINESS ECONOMICS ASSINGMENT Nmims

The document discusses three economics concepts: 1) Indifference curves, which represent combinations of goods that provide the same level of utility. Indifference curves have negative slopes and are convex. 2) Price elasticity of demand is calculated using the formula: percentage change in quantity divided by percentage change in price, multiplied by price over original quantity. 3) Marginal utility is the change in total utility from consuming an additional unit of a good, while average utility is total utility divided by quantity consumed. Both concepts are illustrated in a table.

Uploaded by

Shreyansh Jain
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BUSINESS ECONOMICS ASSINGMENT

Q1) WHAT IS INDIFFERENCE CURVE, EXPLAIN WITH THE HELP OF DIAGRAM


AND ALSO EXPLAIN ITS PROPERTIES.
ANSWER

An indifference curve can be defined as the locus of points each


representing a different combination of two substitute, which yield the same
level of utility to a consumer. therefore the consumer is indifferent to any
combination of two commodities if she or he has to make choice between them.
This is because an individual consumes a variety of goods over time and
realises that one good can be substituted with another without compromising on
the satisfaction level. When these combination are plotted on the graph, the
resulting curve is called indifference curve. This curve is also called the
isoutility curve or equal utility curve. Let us learn indifference curve with the
help of diagram. Assume that a consumer consumes two commodity x and y
and makes 3 combination for the two commodity a,b and c. which is shown in
diagram.

On the indifference curve there can be several other points in points between
a ,b and c, which would yield the same level of satisfaction to a consumer
remains indifference towards any combination of two substitute yielding the
same level of satisfaction now we will head towards the properties of
indifference curve.
Properties of indifference curve
1) Indifference curve are negatively sloped and convex to the origin: the
indifference curve are sloped downwards towards the right. The reason
for the negative slop is that as a consumer increases the consumption of
commodity X he or she sacrifice the some units of commodity Y in
order to maintain same level of satisfaction.also ic are curved inwards,
thus they are convex to the origin. Thus implies that as the consumer
continues to substitute commodity X for commodity Y mrs for X for Y
diminishes along the ic.
2) Higher ic represents higher satisfaction level: A higher ic lying above
and to the rights of another ic implies a higher level of satisfaction and
vice versa. In simple words the combination of commodities on the
higher ic is preferred by a consumer to the combination that lies on a
lower ic.
3) Ic do not intersect: this can be explained by considering a hypothetical
situation where two indifference curve intersect. The point of intersection
would then imply that a combination of commodities on the higher curve
would offer the same level of satisfaction as that on the lower
indifference curve which violates the basic assumption of the ic.

Marginal rate of substitution


Marginal rate of substitution refers to the rate at which one commodity can be
substituted for another commodity maintaining the same level of satisfaction.
The mrs for two substitute goods x and y may be defined as the quantity of
commodity x require to replace the one unit of commodity y such that the utility
derived from either combination remains the same this implies that the utility of
x is equal to the utility of additional units of y added to the combination mrs of
x and y is denoted as y/x as it continues to diminish as the consumer continues
to substitute to substitute x for y or vice versa.
Q2) Consider a demand for a good. At price rs 4, the demand for the good is 25
units. Suppose price of the good increases to Rs 5 and as a result, the demand
for a good falls to 20 units. Calculate the price elasticity?
ANS P =4
Q =25
P1 =5
Q1=20
THEREFORE CHANGE IN PRICE OF GOOD
^P = P1-P
^P =5-4 = 1
^P =1
SIMILARLY CHANGE IN QUANTITY FOR GOODS
^Q = Q1-Q
^Q = 20 -25
^Q = -5
NEGATIVE SIGN IN DEMAND IS GENERALLY IGNORED.THIS IS
BECAUSE PRICE AND DEMAND ARE INVERSELY RELATED

THEREFORE PRICE ELASTICITY OF DEMAND FOR GOOD IS


=^Q/^P * P/Q
= 5/1 * 4/25
=4/5
=0.8
Q3) b CALCULATE MARGINAL UTILITY AND AVERAGE UTILITY
FROM THE INFORMATION GIVEN IN THE BELOW TABLE
QUANTITY CONSUMED TOTAL UTILITY
1 20
2 35
3 47
4 55
5 60
ANSWER
Marginal utility =change in total utility/change in quantity
TU1-TU1-1=35-20=15
TU2-TU2-1=47-35=12
TU3-TU3-1=55-47=8
TU4-TU4-1=60-55=5
QUANTITY TOTAL UTILITY MARGINAL UTILITY
1 20 20
2 35 15
3 47 12
4 55 8
5 60 5

Q3) (a)two goods have a cross elasticity of demand of +1.2 (i) would you
describe the goods as substitutes or complements? (ii)if the price of one of the
goods rises by 5 percent what will happen to the demand for the other goods,
holding other factor constant?
ANSWER
S
e
r
i
e
s

2
IT will have a positive cross elasticity of demand since the goods are
substitute goods and if the price of one of the two goods increases by 5 percent
then it will substitute to the other goods so that quantity demand by this good
will increase and having positive cross elasticity of demand of the other goods
will increase by 1.2* 5% = 6%

6% will happen to the demand for other goods.

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