Problem Set1- Batch 2020-22

1. Y

X
Marginal Rate of substitution at Point A is ___________than point B
a) Greater b) Equal c) Lesser

2. .
Y

X
Marginal Rate of substitution at Point A is ___________than point B
b) Greater b) Equal c) Lesser
3. The cost of attending a private college in India for one month is Rs 6000 for tuition, Rs 2000
for the room, Rs 2500 for meals and Rs 500 for books and supplies. The students could also
have earned Rs 15000 by getting a job instead of going to college. Calculate the explicit cost,
implicit cost and total economic profit of attending a college.
4. A woman managing a photocopying establishment in India for Rs 25000 per year decides to
open her own duplicating place. Her revenue during the first year of operation is Rs 1,
20,000 and the expenses are as follows: -
Salaries to hired- Rs 45000
Supplies: Rs 15000
Rent: Rs 10000
Utilities: Rs 1000
Interest on bank loans: Rs 10000
Calculate the explicit cost, Implicit cost, Business profit and economic profit.

5. Draw a diagram with following information and proof that Price effect= Income Effect +
Substitution effect.
a) Draw a budget line 30=3x+2y
b) Draw a utility curve which get optimize when x=2 and y=12 at Point E.
c) Now let the price of x decreases from Rs 3 per unit to Rs 1.5 unit.
d) In which direction the Budget line will shift as AD?
e) Let the new equilibrium at AD budget line is at x=12 and y=6 at point F.
 f) Now customer wants to remain at earlier IC,
g) What I the new approximate value of x and y at point G.
h) How do you explain the difference between two points P and G.

6. In the following graph the consumer begins in equilibrium with an income of Rs 2000, facing
a prices Px=Rs 5 and Py Rs 10

325
32n

Y axis

200 A

125 200 225 300 325 400

X axis

a. In equilibrium, ________-units of X are consumed.

Now let the price of X rise to Rs 10

b. In the new equilibrium, ______---units of X are consumed.

c. In order to isolate the substitution effect, Rs ________must be given to the consumer.
d. The total effect of the price effect is ____________, the substitution effect is ___, and the
income effect is ______________.
e. Good X is a _____________ good. (normal, inferior, superior)

7. Mr X has a budget of Rs 5000 per week to spend on food (F) and Clothing (C). The market
prices of food and clothing (per unit) are Rs 125 an Rs 250, respectively. His utility function is
U= 25 FC. Based on this information advise Mr X on his following questions:
a) What demand function for each goods Mr X faces in the market? [Hint: relationship
between C and F with their respective prices ]
b) At equilibrium what is the value of MRS?
c) Mr. X is rational in choosing his consumption basket. If so, what consumption basket he
must choose? [Hint relationship between C and F at equilibrium]
d) Suppose due to monsoon food price falls to Rs 100, ceteris paribus (other things remaining
constant) how his optimum consumption basket would change?
 8. Reema is pursuing her MBA education at a business school. She receives utility from the
grades (marks) she receives in her exams and the leisure (entertainment) she gets. Her
utility function from the two goods is described by the following function:
U=25 GL
Where, U= Utility, G= Grade (GPA) she earns, L= Leisure she enjoys
At her business schools, grade is assign in a letter grade, which is convertible in to a numerical
value ranging from zero to 10. As one would expect, the grade depends on time spent on studies
(Ts) and the relationship between the two is describes by the following:
G=0.8 Ts
Her constraint is the time at her disposal, which is 24 Hours in a day, thus
24=Ts +L or 24= 1.25 G+L
According to Reema faces a trade-off between grade and leisure. Advise her on the following
decision issues:
a) What in her Indifference curve if she wants to earn a utility level of 2000 and 3000?
b) Determine the optimum allocation of time between studies and leisure for Reema.
c) Determine the maximum attainable utility level for Reema.

Put Different value of Uo as 2000 and 3000, calculate different combination of G and L, and calculate
MRS for each. Like for Uo as 2000, put different values of G from 1 to 5 and calculate L and then MRS

G L MRS
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