ASSIGNMENT 2 --------------------------------------------------------------------------------------------------------------------- COURSE TITLE/ CODE : PRINCIPLES OF MICROECONOMICS CIX1001 SEMESTER : SESSION 2018/2019 – SEMESTER 1 TUTORIAL CLASS : WEDNESDAY (2PM-3PM) PREPARED BY: NAME NO. MATRIC ALVIN YEAP SHI KHAN CIC180003 ANG WAN WEI CIC180005 CHEAH YEN YEN CIC180007 GOH YEE SIN CIC180017 JONATHAN NG CIC180022 MERVYN LAU TECK QIN CIC180030 SEE THOR REN SHENG CIC180055 TAN KAI XUAN CIC180058 TAN YAN LIN CIC180059 Question 1 Match the following descriptions of preferences to the indifference curve diagrams that follow. Based on the indifference curve chosen, explain your answer for each items focusing on the shape of the curve. i. ________ drinks. Ann does not care whether she has more diet soft drinks or fewer diet soft ii. ________ Peter is very picky about his buttered popcorn. He tops every quart of popped corn with exactly one quarter cup of melted butter. iii. ________ Amy likes M&M's, plain and peanut. For Amy, the marginal rate of substitution between plain and peanut M&M's does not vary with the quantities of plain and peanut M&M's she consumes. iv. ________ to eat it. v. ________ Natalya likes rap and rock music. Natalya's preferences exhibit a diminishing marginal rate of substitution between the two types of music. vi. ________ Matthew knows his limit. He likes beer up to a point, but if he drinks too much he gets sick. George dislikes broccoli and would be willing to pay something to not have (24 marks: 4 marks each) (Total: 24 marks) i. B. In this case, diet sofrdrinks act as a neuter good where the amount of dieat soft drinks will not affect the amount of satisfaction for Ann. By using the indifferent curve of B, it's best explain to this situation. Diet soft drinks as a neuter good at x-axis and another normal good as y-axis. More normal good will give more satisfaction as all consumer prefer more is better than less. So, the indifferent curve will move upward as the utility is greater. Neutral good will not affect the level of satisfaction so that the shape of curve will be horizontal. ii. F. If two goods are perfect complements then the indifference curves will be L-shaped. The consumer’s utility will not increase unless both goods increase in the required proportion. In this case, Peter is no better off having several quarter of popped corn if he has only one quarter cup of melted butter. The additional popped corn has zero marginal utility without additional cup of melted butter, so the bundles of goods differ only in the number of popped corn he has. iii. D. This is the case for goods or bundle of goods which are the plain and peanut M&M's as the perfect substitutes. The indifference curves are in linear form and will have a constant slope since Amy is willing to switch the M&M's at a fixed ratio. The marginal rate of substitution between plain and peanut M&M's is likewise constant. iv. A. George is assuming that the broccoli is a bad thing to him because he doesn't like to have it. So, the indifferent curve will be positively upward slopping. Broccoli will act as x-axis in the graph. The indifferent curve will move to the left as the broccoli consume by George will be lesser. If the graph is move toward right, the more broccoli George will have and this will decrease the level of satisfaction for George. v. C. The slope of an indifference curve, known as the marginal rate of substitution, shows the rate at which consumers are willing to give up one good in exchange for more of the other good. The indifferent curves between rap music and rock music are convex to the origin, describing the negative substitution effect. Natalya will prefer to give up fewer rap music to listen to rock music. This will cause the marginal rate of substitution decreases as moving down the indifference curves. vi. E. Indifferent curve E will best explain this situation. In the front part of the graph, the indifferent curve is move upward and toward right. It means that more consuming of beer will give more satisfaction to Matthew. Yet, the part after it will be moving upward and toward left. It means that more consuming of beer has already decrease the satisfaction becausw it will cause Matthew fall to sick. Question 2 Consider Rahim utility function: U (X, Y) = 12 XY, where X and Y are two goods. If the individual consumed 15 units of X and received 1800 units of utility, how many units of Y must the individual consume? Would a market basket of X = 10 and Y = 5 be preferred to the above combination? Explain. (6 marks) (Total: 6 marks) Given that U (X, Y) = 1800, X =15 U (X, Y) = 12 XY 1800 = 12 (15)Y 1800 = 180Y Y = 10 The individual must consume 10 units of Y in the combination to receive 1800 units of utility. Given that X = 10, Y = 5 U (X, Y) = 12 XY U (X, Y) = 12 (10)(5) U (X, Y) = 600 Hence, the first combination would be preferred as the unit of utility for the market basket of X =10, Y =5 is lesser than the previous market basket of X =15 and Y =10.
