MICRO ECONOMICS

1. Utility Function
U (F,C) = 20^3 C^3
a) Income = 10C +2F
50=10C+2F
MRS = -MUH = - MUC
MUV MUF
50 50
2 = - 25, 10 =5 -5 = -1
25 5
SLOPE Y2-Y1/ X2-X1

F
25

-1/5

5 C
BUDGET CONSTRAINT 50 = 10C + 2F
b) MRS = Muc/Muf
MUc = du/de
= 20f^3 3C^2-------------- (i)

MUf =du/df
= 20C^3 3F^2----------------(ii)

Therefore, MRS = -20F^3C^2/20C^3F^2

MRS= -C/F
Thus Marginal rate of substitution is -C/F
(C)
F = 5C C= F/5
10C+2F=50 10C+2F=50
10C+2(5C)=50 10*F/5+2F= 50
20C=50 10F/5+2F=50
C=50/20 10F+10F/5=50
C=2.5 20F=250
F=12.5

2) (a) (i) P = 1
Q= 100 -2 (1)
= E =98/1=98
= relatively elastic
(ii) P =25
Q= 100 – 2 (25)
Q= 100-50
=E= 50/25 =2
= relatively elastic
(iii) P = 49
Q=100-2(49)
=E= 2/49 = 0.04
= relatively elastic
3) (a)
The demand for toothpaste is more price elastic the specific brand is not essential to the
consumer. The rise in price is the responsive quantity demanded the specific brand of
toothpaste hence If the price of a specific brand is too much of consumer will naturally
avoid spending money and it reacts very much of price change and reduce the quantity
of the product on another hand if a general brand of toothpaste it is one of the essential
of the consumers thus ‘demand is less price elastic is nature no matter how much price
change in consumer will have to bye it is less price in nature the brand of toothpaste is
too less or too much consumer will buy and it not affect the quantity of demand of
consumer