LOVELY PROFESSIONAL UNIVERSITY

Home-Work1

School : LIM Department of Management

Name of the faculty member : Palwinder Kaur

Course No. ECO515 Course Title: Managerial Economics

Class: MBA Semester I Section: T1001 Batch 2009-11

Max. Marks: 15

S.no.

1. Rohan consumes two commodities, wheat and rice. The marginal utility derived by him from
rice is two and half time the utility derived from the marginal utility of wheat. If wheat is
available for Rs.12 /kg, what price will he be willing to pay for rice in order to maximize his
utility?

Ans. Suppose Marginal utility for wheat is 1 util.

Hence marginal utility for rice is 2.5 utils.
Price for wheat is Rs. 12.
So, according to law of diminishing marginal utility:-
to maximise Rohan’s utility the price for rice must be fixed at MU1÷P1=MU2÷P2
1÷12=2.5÷P2
Hence P2=Rs.30
2 The fundamental economic problems of what to produce, how to produce and for whom to
produce are solved differently by different economic systems. Discuss how a capitalist
Economy solves these problems
.
Ans.
3 Tomatoes and potatoes are available for Rs. 7/kg and Rs. 10 /kg respectively. If you have an
income of Rs. 35000, draw the budget line as graph.

Ans A good is demanded by the consumer if he has: (i) a preference for that good and (ii) purchasing
. power to buy the good. His preference pattern is represented by a set of indefference curves, while
his purchasing power depends upon his money income and market prices of tomatoes and potatoes
where his money income is set at Rs. 35000. Then his purchasing power can be represented in terms
of a budget equation:
E=!Syntax Error, ..
Where E= Expenditure on tomatoes and potatoes;

Qx and Qy= Quantity of tomatoes and potatoes respectively; and

Px and Py= Prices of tomatoes and potatoes respectively.

The budget equation gives us a budget line.

The maximum quantity of tomatoes can be found from the the budget equation:
35,000=5,000×Rs.7+Rs.0×10; Qx=5,000.
Similarly, the maximum quantity of potatoes can be found from the the budget equation:
35,000=0×Rs.7+3,500×Rs×10; Qy=3,500.

B
Units of tomatoes 5000 E/Px

Budget Line

E/Py
Units of potatoes
O A 3500
Fig. The Budget Line

So, the combinations (5000,0) and (0,3500) are possible consumption bundles within the budgeted
amount of money. By joining these two two points in a graph we gety the budget line AB. All
combinations of tomatoes and potatoes on the budget line can be purchased by the consumer if he
spends whole of his allocated money on tomatoes and potatoes given prices of both of them.