Question 1

Q1: What do you mean by the budget set of a consumer?

Accepted Answer

The budget set of a consumer refers to the collection of all consumption bundles (combinations of two goods) that the consumer can afford to buy with her given income at the prevailing market prices. It includes all bundles where the total expenditure is less than or equal to the consumer's income....

Question 2

Q10: What do you mean by 'monotonic preferences'?

Accepted Answer

Monotonic preferences mean that a consumer always prefers a bundle that has more of at least one good and no less of the other good. In simple terms, it reflects the assumption that 'more is better'. Specifically, a consumer's preferences are monotonic if, for any two bundles (x₁, x₂) and (y₁, y₂):...

Question 3

Q11: If a consumer has monotonic preferences, can she be indifferent between the bundles (10, 8) and (8, 6)?

Accepted Answer

No, a consumer with monotonic preferences cannot be indifferent between the bundles (10, 8) and (8, 6). According to the principle of monotonic preferences, a consumer always prefers a bundle that contains more of at least one good and no less of the other. Let us compare the two bundles:    Bundle...

Question 4

Q12: Suppose a consumer's preferences are monotonic. What can you say about her preference ranking over the bundles (10, 10), (10, 9) and (9, 9)?

Accepted Answer

If a consumer's preferences are monotonic, we can establish a clear preference ranking among the bundles (10, 10), (10, 9), and (9, 9) based on the 'more is better' principle. 1.  Comparing (10, 10) and (10, 9):     The bundle (10, 10) has the same amount of good 1 as (10, 9) but more of good 2 (10...

Question 5

Q13: Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?

Accepted Answer

No, the preferences of my friend are not monotonic. Monotonic preferences imply that a consumer will always prefer a bundle that has more of at least one good and no less of the other. Let us compare the two bundles:    Bundle 1: (5, 6) has 5 units of good 1 and 6 units of good 2.    Bundle 2: (6, 6...

Question 6

Q14: Suppose there are two consumers in the market for a good and their demand functions are as follows: $d_{1}(p)=20-p$ for any price less than or equal t...

Accepted Answer

To find the market demand function, we perform a horizontal summation of the individual demand functions, D(p) = d₁(p) + d₂(p). We must consider different price ranges. Case 1: Price (p) is greater than 20 (p > 20)    Consumer 1's demand: d₁(p) = 0    Consumer 2's demand: d₂(p) = 0 (since p > 15)...

Question 7

Q15: Suppose there are 20 consumers for a good and they have identical demand functions: $d(p)=10-3 p$ for any price less than or equal to $\frac{10}{3}$ a...

Accepted Answer

The market demand is the sum of the individual demands of all consumers. Since there are 20 consumers with identical demand functions, we can find the market demand by multiplying the individual demand function by 20. Individual demand function: d(p) = 10 - 3p Number of consumers = 20 Market demand...

Question 8

Q16: Consider a market where there are just two consumers and suppose their demands for the good are given as follows: Calculate the market demand for the...

Accepted Answer

To calculate the market demand for the good, we add the quantities demanded by each consumer (d₁ and d₂) at each price level (p). The market demand (Dm) is the horizontal summation of individual demands. Dm = d₁ + d₂ We can calculate this for each price given in the table:    At p = 1, Dm = 9 + 24 =...

Question 9

Q17: What do you mean by a normal good?

Accepted Answer

A normal good is a good for which the demand increases as the consumer's income increases, and decreases as the consumer's income decreases, holding other factors like price constant. There is a positive relationship between a consumer's income and the quantity demanded of a normal good. For example...

Question 10

Q18: What do you mean by an 'inferior good'? Give some examples.

Accepted Answer

An inferior good is a good for which the demand decreases as the consumer's income increases, and increases as the consumer's income decreases. There is an inverse relationship between a consumer's income and the quantity demanded of an inferior good. This happens because as consumers become wealthi...

Question 11

Q19: What do you mean by substitutes? Give examples of two goods which are substitutes of each other.

Accepted Answer

Substitutes are goods that can be used in place of each other to satisfy a particular want. The demand for a good usually moves in the same direction as the price of its substitutes. If the price of one substitute good increases, the demand for the other substitute good will rise as consumers switch...

Question 12

Q2: What is budget line?

Accepted Answer

The budget line represents all the consumption bundles (combinations of two goods) that a consumer can purchase by spending her entire income. It is a graphical representation of all bundles that cost exactly equal to the consumer's income (M). The budget line forms the boundary of the budget set. T...

Question 13

Q20: What do you mean by complements? Give examples of two goods which are complements of each other.

Accepted Answer

Complements, or complementary goods, are goods that are consumed together. The demand for a good moves in the opposite direction of the price of its complementary good. If the price of one complementary good increases, the demand for the other good will fall because the overall cost of using them to...

Question 14

Q21: Explain price elasticity of demand.

Accepted Answer

Price elasticity of demand (eD) is a measure of the degree of responsiveness of the quantity demanded of a good to a change in its price. It quantifies how much the demand for a good changes when its price changes. It is calculated as the percentage change in quantity demanded divided by the percent...

Question 15

Q22: Consider the 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...

Accepted Answer

Given:    Initial Price (P₁) = Rs 4    Initial Quantity (Q₁) = 25 units    New Price (P₂) = Rs 5    New Quantity (Q₂) = 20 units First, we calculate the percentage change in quantity demanded: Percentage change in quantity = [(Q₂ - Q₁) / Q₁] × 100 = [(20 - 25) / 25] × 100 = [-5 / 25] × 100 = -20% Ne...

Question 16

Q23: Consider the demand curve $D(p)=10-3 p$. What is the elasticity at price $\frac{5}{3}$ ?

Accepted Answer

Given the linear demand curve: D(p) = q = 10 - 3p The formula for price elasticity of demand for a linear curve is: eD = (-b) × (p/q) Where 'b' is the slope coefficient of price in the demand function. From the equation, we can see that b = 3. Step 1: Find the quantity (q) at the given price (p = 5/...

Question 17

Q24: Suppose the price elasticity of demand for a good is -0.2 . If there is a $5\%$ increase in the price of the good, by what percentage will the demand...

Accepted Answer

Given:    Price elasticity of demand (eD) = -0.2    Percentage increase in price = 5% We use the formula for price elasticity of demand: eD = (Percentage change in quantity demanded) / (Percentage change in price) -0.2 = (Percentage change in quantity demanded) / 5% To find the percentage change in...

Question 18

Q25: Suppose the price elasticity of demand for a good is -0.2 . How will the expenditure on the good be affected if there is a $10\%$ increase in the pric...

Accepted Answer

Given:    Price elasticity of demand (eD) = -0.2    Percentage increase in price = 10% The relationship between price elasticity and total expenditure is as follows: When demand is price inelastic (i.e., the absolute value of elasticity is less than 1), total expenditure moves in the same direction...

Question 19

Q27: Suppose there was a $4\%$ decrease in the price of a good, and as a result, the expenditure on the good increased by $2\%$. What can you say about the...

Accepted Answer

The relationship between a price change, the change in expenditure, and the price elasticity of demand helps us answer this question. Given:    Price of the good decreased by 4%.    Expenditure on the good increased by 2%. We observe that the price and the total expenditure moved in opposite directi...

Question 20

Q3: Explain why the budget line is downward sloping.

Accepted Answer

The budget line is downward sloping because a consumer has a fixed income. To purchase more of one good, the consumer must purchase less of the other good. This inverse relationship between the quantities of the two goods gives the budget line its negative slope. If a consumer decides to increase th...

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