HOMEWORK 2

Introduc on to Microeconomics

Ques on 1:
1- What is the di erence between Income Elas city of Demand and Price Elas city of
Demand? Income elas city refers to a horizontal shi of the demand curve while price
elas city demand refers to a movement along the demand curve
2- State a de ni on of Cross elas city of demand. The measure of responsiveness of the
demand for a good towards the change in the price of a related good
3- What means a high posi ve cross elas city? the demand for good A will increase as the price
of good B goes up

4- What means a high nega ve cross elas city? the demand for good A will decrease as the
price of B goes up
5- State the de ni on of Total u lity the aggregate amount of sa sfac on or ful llment that
a consumer receives through the consump on of a speci c good or service
6- State the de ni on of Marginal u lity the added sa sfac on a consumer gets from having
one more unit of a good or service
7- Give the di erent assump ons of the indi erence – curve theory. The consumer is ra onal
to maximize the sa sfac on and makes a transi ve or consistent choice
8- Give the de ni on of Indi erence curve chart showing various combina ons of two goods
or commodi es that leave the consumer equally well o or equally sa s ed
9- De ne the marginal rate of subs tu on the amount of a good that a consumer is willing to
consume compared to another good, as long as the new good is equally sa sfying

10- What ‘Diminishing marginal rate of subs tu on’? MRS decreases as one moves down a
standard convex-shaped curve, which is the indi erence curve

11- Give the de ni on of the budget constraint of the consumer. the boundary of the
opportunity set—all possible combina ons of consump on that someone can a ord given
the prices of goods and the individual's income

12- De ne Average Product (AP) and Marginal Product (MP). AP: the output produced by per
unit of variable factor (labour) employed MP : the addi onal product that is produced as a
result of adding an addi onal unit of input

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 Ques on 2: True of false
1- The lower the degree of closeness of subs tutes, the greater the elas city of demand of
the good or service F
2- The wider the range of uses of a product, the higher the elas city of demand T
3- When factors of produc on aren’t available, supply will highly be elas c and vice versa. T
4- The Cardinalist Theory argue that u lity can not be measured. F
5- The Slope of Indi erence curve is posi ve F
6- If X and Y are perfect subs tutes, the indi erence curve becomes a straight line with
posi ve slope F
7- Consumer will maximise sa sfac on where the budget line is tangent to the indi erence
curve T
8- As long as MPL is increasing, TPL will con nue to raise at a diminishing rate. F
9- When AP reaches zero, TP reaches its maximum. F
10- MPL =APL when MPL is at maximum F

Ques on 3:
If the price rises by 3 %, the quan ty demanded falls by 1.5 %. Calculate the price
elas city of demand. 3% / 1.5% = 2

Ques on 4:
If the price falls from 6 to 4, the quan ty demanded rises from 8000 to 12000.
À Calculate the price elas city of demand by using arc elas city.
ΔQ=Q2 −Q1 =12000−8000=4000
Δp=p2 −p1 =6−4= 2
p1 + p2 =10
Q1 +Q2 =20000
Ep = 4000/ 2 * 10 / 20000 = 1

Ques on 5

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 Units of commodity X Total U lity Marginal U lity

1 180 180
2 330 150
3 430 100
4 510 80
5 570 60
6 610 40
7 640 30
8 650 10

Determine the Table Above

Ques on 6. 1- A consumer spends his income of 300 on good A or on good B or on any

combina on of A and B. One unit of A costs 3 and one unit of B 5. Draw a budget line.

A 300/3
Increased

300/5

2- If the income rises from 300 to 360, other things remaining equal. Draw an addi onal new
budget line to illustrate the change.
3- If the price of 1 unit of B falls from 5 to 4, other things remaining
equal. Draw an addi onal new budget line to illustrate the change

Ques on 7

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B C
A
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1

Explain why the consumer chooses neither B nor C, but A. Combina ons of goods lying on a
higher indi erence curve (as C) yields higher level of sa sfac on and are preferred to those
on lower indi erence curves (as B) which yield lower u lity

Ques on 8:

Capital (K) Labour (L) TPL APL MPL Stages

5 0 0 0 0
5 1 10 10 10
5 2 30 15 20 I
5 3 60 20 30
5 4 100 25 40
5 5 150 30 50
5 6 195 32.5 45
5 7 231 33 36
5 8 248 31 17 II
5 9 252 28 4
5 10 252 25.2 0
5 11 250 22.7272727 -2
5 12 246 20.5 -6
III
5 13 234 18 -12

1- Complete the Table above

2- De ne di erent stages of produc on

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