INTERNAL ASSIGNMENT - JUNE 2022 EXAMINATION

COURSE: BUSINESS ECONOMICS

Q1. Assume that a consumer consumes two commodities X and Y and makes five
combinations for the two commodities:

TABLE BELOW

Combination Units of X Units of Y

A 25 3

B 20 5

C 16 10

D 13 18

E 11 28

Calculate Marginal rate of Substitution and explain the answer. (10 Marks)

Answer 1.

Introduction:

Each business works upon the responses it receives from its clients. The extra the clients will
like its products and services, the extra sales it'll generate, and the more market share. In
economics, it is known as the pleasure that a client derives from consuming any product.
Consequently, there's a sheer requirement that the producers choose a particular method to
measure this delight to work accordingly to gain a far larger market share. There are, thus,
diverse methods to measure this stage of satisfaction, one among which is the Indifference
Curve.

Concept & Application:

Marginal Rate of Substitution:

In any marketplace, there are various items for the consumer's benefit. The goods may be
homogenous or heterogeneous. Every proper is made for intake by using the client. The
patron can compare the goods on various bases, determining which product will deliver him

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more satisfaction. After all, the complete sport in economics production and consumption is
the client's pleasure. Something items will fulfill the consumer more significant, the greater
will be the demand for that product, and the greater the call for, the greater would be the
production of that product and the extra the manufacturing, the more could be revenue
generation, and subsequently, the market equilibrium might be maintained as an advanced
marketplace alongside the final GDP. This analysis lacks many within your means aspects
that could help increase the market's GDP. The idea for this satisfaction precept is utility.
Utility refers to the diploma of pleasure or satisfaction a person will receive from doing a
financial activity. Within the instant case, it will be the pleasure or the delight that one
customer will benefit from eating the goods. For instance, if a purchaser purchases a
hamburger to relieve hunger pangs and enjoy a tasty meal, the intake of that hamburger will
refer to gaining some utility.

The marginal substitution price refers to the number of goods a customer is inclined to
another top. This principle works at the precept that the utility or the pleasure derived out of
the intake of each product is equal or equal. The marginal substitution price is used inside the
evaluation of the indifference curve. The indifference curve is one of the ordinal strategies for
measuring the consumers' utility. On this, the customer's pleasure level from the two given
groups is assessed. Then at every point, it's far located that the pleasure level of the consumer
stays equal. The instant the purchaser begins consuming more than 1 product; it will reduce
the intake of the alternative and vice versa. That is how a consumer can divide its software
and satisfy its pride from the two to be had products to devour.

The indifference curve is a poor slope: it's miles due to the Marginal charge of Substitution
that the indifference curve has a bad slope. It’s far the ratio between the marginal utilities of
two commodities. it is expressed as: MRS x,y = – ΔY /ΔX = MUx/MUy. With the rise inside
the consumption of precise A, the consumption of appropriate B decreases. There's a
diminishing marginal fee of substitution, which has a resultant effect on the terrible slope.

Combination Units of X Units of Y

A 25 3

B 20 5

C 16 10

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 D 13 18

E 11 28

For combination A, the MRS is 25/3,

= 8.33

For combination B, the MRS is -5/2

= -2.5

For combination C, the MRS is -4/5

= -0.8

For combination D, the MRS is -3/8

= -3.7

For combination E, the MRS is -2/10

= -0.2

Its miles to be mentioned that the Marginal price of Substitution is poor due to the negative
slope of the indifference curve. It is because as quickly as you start increasing the
consumption of 1 good, say X. You will start diminishing the consumption of the some other
true, say Y. it's so due to the fact the extent of or amount of pleasure being performed at all of
the points or any of the factors over the curve is same.

Conclusion:

There are ordinarily methods through which the satisfaction/ utility of the client can be
measured, the cardinal and the ordinal strategies. The cardinal strategies are primarily where
the pride is measured in phrases of numerals/ numbers. The opposite method is the ordinal
approach, in which the utility is measured in phrases of ranking. The indifference curve is
one of the ordinal methods of measuring the utility of the purchasers. On this, the customer's
delight stage from the two given communities is assessed. Then at each point, it is found that
the satisfaction stage of the consumer remains identical. The moment the consumer starts
ingesting extra than 1 product, it'll reduce the amount of consumption of the other and vice
versa. That is how a customer can divide its application and satisfy its pride from the two
available products to devour.

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Q2. Elaborate the term Total Revenue and Marginal revenue also calculate TR and MR
in the given table:

Price Output (In Units ) Total Revenue Marginal

20 1
18 2
16 3
14 4
12 5

Answer 2.

Introduction:

Sales are the income generated using the company or an organization from the sale of a good
or provider by the manufacturer to its customers. Technically, sales are calculated by
multiplying the commodity's price by the amount of the product. In monetary phrases, a firm
tries to provide an increasing number until the marginal revenue of the goods is greater than
the product's price. It suggests that the manufacturer can cover its standard variable value, it
approaches that the manufacturer is at an earnings-making stage, and hence, he can retain the
production for the future. The profit-making business is the remaining reason for any
producer.

Concept & application:

TOTAL REVENUE, MARGINAL REVENUE:

Overall sales refer to the earnings generated using the producer from the total manufacturing
of all the gadgets. The full sales can be computed as the multiplication of the commodity's
price and the amount produced by the producer. This can be written as:

TR = P * Q; where

P= price of the commodity

Q= quantity supplied of the product

TR= total revenue

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It prefers not to the charge calculated by combining the costs of all the factors, but it is the fee
price inclusive of the internet or gross profit through the manufacturer. Best then, we'd be
capable of computing the actual general sales. The sales consist of each cost price and the
earnings margin via the producer. The profit may be computed later. In any other case, the
computation of general revenue shall be disturbed.

Marginal revenue, however, is the revenue or the income that the producer will gain from
generating each extra unit. it is calculated beyond the production done at the manufacturing
of the primary product. E.g., the sales that the manufacturer could be getting from generating
an extra unit of the textiles would be referred to as a marginal product.

It is computed as:

MR= change in TR from each extra unit produced/ exchange in several portions produced.

The ultimate motive of any firm or enterprise is to make earnings. The more the profit, the
more the sustenance of the producer in the longer term. When a company’s output is such
that marginal sales and marginal value for the last unit produced are the same, that firm is
said to be maximizing its profits.

In easy terms, it's far the revenue generated from the producer's sale of the additional unit.
The usage of marginal revenue is completed by way of the advertising managers group to
recognize the call for the consumers, plan the marketing schedules, and set the product prices.
In financial terms, a firm tries to supply more and more until the marginal revenue of the
products is more than the product's price. As it indicates that the producer can cover its
standard variable cost, it method that the producer is at an income-making stage.
Consequently, he can hold the manufacturing for destiny. The income-making commercial
enterprise is the last reason for any manufacturer.

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 Price Output (In Units ) Total Revenue Marginal

Revenue
Here, in the
20 1 20 20
above desk, it
is evident
18 2 36 16
that as quickly
as the 16 3 48 12 total
revenue begins
14 4 64 16

12 5 60 -4

decreasing, the marginal revenue turns poor. We should be aware that it's far impossible for
total sales to get 0 because neither the rate nor the quantity produced in general surroundings
may be 0. but, the marginal revenue maybe 0 or even poor depending upon the revenue
generated from the production of every additional unit. If the revenue generated at two prices
with exceptional commodities is identical in accounting years, the marginal revenue might be
zero. However, if because of any internal or external factors, the production procedure
receives reduced and the rate of the commodity also decreases, the revenue era could be
decreased. As a result, making the marginal revenue goes into the negatives. So, the graph of
total sales shall constantly remain high-quality. However, the graph of marginal revenue may
be positive, zero, and even poor.

Conclusion:

Total sales refer back to the manufacturer's income from the entire production of all of the
units. The whole sales can be computed because of the multiplication of the rate of the
commodity and the quantity produced by the manufacturer. Marginal sales, then again, is the
revenue or the income that the producer will benefit from producing each additional unit. Its
miles are calculated past the production performed on the production of the primary product.

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3.a. From the given Demand Schedule for air tickets, calculate elasticity of demand.

Price of Air Ticket Quantity Demanded (Tickets per month)

(Per Ticket)

1,00,000 5,000

1,20,000 3,500

Answer 3.a.

Introduction:

Demand is a negative observation concerning the charge, i.e., every time the charge of
commodity changes, it additionally modifications its demand. That's a terrible trade. The
degree to which that trade has to arise is determined through the rate elasticity of demand.
Price elasticity of demand is a vital idea of the law of demand. Its miles a critical advertising
exercise for predicting how consumers respond to a one-of-a-kind shape of stimulus. Charge
elasticity of demand, as it is popularly called, is a financial dimension of how the amount
demanded is suffering from modifications in its rate.

Concept & Application:

Elasticity of demand:

Price Elasticity of demand is an economic idea used to determine the degree to which any
alternate has been added up inside the demand of the commodity while there is a charge
alternate. It is used for maintaining the marketplace equilibrium, and the producer is also
helped by way of it so that they may produce handiest the one's goods that show much less
elasticity. It often depends upon the nature of products, i.e., high-priced goods, essential
goods, substitute goods, or complementary items.

In economics, there are five ways of degree wherein any trade may be delivered in the
demand of a commodity.

Substitute items are the ones that are used or consumed in the region of one another. For
example, tea and coffee. When the charge of tea increases, the consumer will shift to devour
espresso and vice versa.

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However, complementary items are items that might be consumed collectively, e.g., bread
and butter. After the bread rate increases, the demand for butter can even reduce and vice
versa.

There are ordinarily five forms of rate elasticity of demand:

1. Unitary Elastic (ed=1)

2. Highly Elastic (ed >1)

3. Highly Inelastic (ed < 1)

4. Perfectly Elastic (ed= infinity)

5. Perfectly Inelastic (ed=0)

In the instant case, price elasticity of demand can be computed as:

When the price is 1, 00,000, the demand is for 5000 units;

When the price rises to 1, 20,000, the demand reduces to 3500 units.

The price elasticity can be computed as:

Ed = % change in Quantity demanded/ % change in price

   = (-) 30%/ 20%

   = - 1.5

Conclusion:

Price elasticity of demand acts as a measuring unit within the hands of the producer if you
want to suggest in what quantity they need to supply the given product. The terrible sign
within the immediate case suggests the negative slope of the demand curve. The ed is -1.5,
which is less than 1, which means that the product is high prices inelastic in nature. A
moderate upward thrust inside the charge has brought a greater significant trade in the
amount demanded of the product.

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3.b. Elaborate the term Elasticity of Supply and explain any three factors that
determines elasticity of supply (5 Marks)

Answer 3.b.

Introduction:

The elasticity of supply refers to the ratio of percent trade-in amount furnished with the share
exchange inside the rate of the commodity. It refers to the responsiveness of the quantity
supplied regarding the alternate inside the rate of the commodity.

Concept & Application:

Elasticity of supply:

The elasticity of delivery refers to the ratio of percent alternate in the amount supplied with
the percentage change inside the commodity's price. It refers back to the responsiveness of
the quantity provided concerning the alternate price of the commodity. It could be computed
as:

Es= % change in quantity supplied/ % change in price 

It needs to be referred to that the significant issue affecting the quantity provided of any
commodity is the charge of the personal commodity. That’s why it is referred to as rate
elasticity of supply.

Factors for determination of elasticity of supply:

The following elements play a first-rate function in figuring out the price elasticity of supply:

1. The number of producers: The number of producers in the market/ industry of the
homogenous product perform a vital function within the determination of supply. If
the market has more producers, it will cause competitiveness. Therefore the charge of
the commodity needs to be reduced to increase the delivery so that the consumer base
may be attracted. But, if there are fewer manufacturers, the price change could be
significantly much less.
2. Factor Mobility: It refers to the reality that if it is simple to shift the thing sources
within the market, the rate elasticity of supply might be extra. However, if the aspect
mobility is less within the market, the deliver elasticity could be inelastic.
3. The period of more training: If a firm invests inside the capital, the supply is more
elastic when the rate increases.

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 4. Ease of storage: if the produced good is simple to shop, it shall have extra elasticity,
and if the product is perishable, it shall have less elasticity.
5. Government Subsidies: if the authorities are supplying subsidies to the producers for
the manufacturing of positive items, the elasticity of supply would be greater elastic,
and if there could be no subsidies, the elasticity of supply would be much less.

Conclusion:

Elasticity refers to the responsiveness of demand or delivery concerning the price of the own
commodity. Inelasticity of delivery, the quantity provided of commodity changes with a
percentage change in the rate of the commodity.

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