Page 87 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes (b) The following are the bundles that Manish can afford with his income:
Books Coffee

1
0
8
2
In the above table, fill in the blanks with the quantities that will exhaust Manish’s

income.
(c) Manish gets a research grant and his income increases to ` 4000 a month. What is
the new equation of his budget line? What if income stays constant at ` 2000, and the
price of a book increases to ` 5000?

(d) Assume that prices are the same as used in part a. If the marginal utility of a book is
20, what is the marginal utility of coffee if he is maximizing his utility?
(e) Now assume that textbooks and coffee are complements for Manish. For him to
consume one textbook, he needs 1 cup of coffee. How many textbooks does he
consume given his income of ` 2000, and the prices used in part a? What if economics
is so boring that Manish needs 2 coffees for every book that he consumes?
3. What assumptions would you never alter while working on the theory of individual choice
and why?

4. The marginal utility of consumption of good A is 40; it changes by 2 with each change in
good A consumed. The marginal utility of consumption of another good B is also 40 but
changes by 3 with each change in good B consumed. The price of good A is ` 20 and the
price of good B is ` 30. How many of good A and good B should you consume?
5. The following table shows the marginal utility of your consumption of three goods, A, B
and C.
Units of Consumption MU of A MU of B MU of C
1 20 25 45
2 18 20 30
3 16 15 24
4 14 10 18
5 12 8 15
6 10 6 12
(a) Good A costs ` 80 per unit, and good B costs ` 40 and good C costs ` 120. How many
units of each should be consumed with ` 480 to maximise utility?

(b) How will the answer change if the price of B rises to ` 80?
6. Explain the properties of indifference curves with the help of suitable examples.
7. Explain the concepts of consumer and producer surplus with help of an example and
fi gure.

8. What is a budget line and how is it useful in reaching consumer equilibrium?
9. Explain the concept of Income Consumption Curves.
10. Show that Price Effect can be broken down into income and substitution effect.

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