Microeconomics | Assignment 1| Dr. GK
1. Calculate price elasticity of demand curve, P = 100 - 5Q at each of the following price
and quantity levels.
P = 90 and Q = 2
P = 50 and Q = 10
P = 5 and Q = 19
2. Given: P.Q = 500, what happens to price elasticity of demand as price falls (P = Price, and
Q = Quantity Purchased)?
3. An individual spends all his income on two goods, X and Y. If with the rise in price of
good X, the quantity purchased of good Y remains unchanged, what is the price elasticity
of demand for X?
4. The price elasticity of demand for colour TV is estimated to be – 2.5. If the price of
colour TV is reduced by 20 percent, how much percentage increase in the quantity of
colour TVs sold do you expect?
5. Studies in the United States of America indicate that price elasticity of demand for
cigarettes is 0.4. If a pack of cigarettes currently costs $2 and the government wants to
reduce smoking by 20 percent by how much should it increase the price?
6. In the attempts to increase sales and profits, a firm is considering 5 percent increase in the
price and 15 percent increase in the advertising expenditure. If the price elasticity of
demand is – 1.5 and advertising elasticity is + 0.7, would there be increase or decrease in
total revenue?
7. Explain the relationship between the total revenue of firm and the price elasticity of
demand for price reduction.
8. Explain why a firm facing a downward sloping demand curve would never produce at the
inelastic (ep < 1) portion of the demand curve.
9. Show that on a linear demand curve, price elasticity of demand decreases continuously
from infinity at the price axis to zero at the quantity axis.
10. For the demand curve Q(p) = a + bp find the equation for point price elasticity of demand.
11. Show that if indifference curves are concave, a consumer will consume only one of the
two goods.
12. Amit’s budget line relating good X and good Y has intercepts of 50 units of good X and
20 units of good Y. If the price of good X is 12, what is Amit’s income? What is the price
of good Y? what is the slope of budget line?
13. Wha is marginal rate of substitution? An indifference curve of Sonia contains the
following market baskets of apples and bananas. Each of these baskets gives her equal
satisfaction.
Market basket Apples
Bananas
1
2
16
2
3
11
3
4
7
4
5
4
5
6
2
6
7
1
Find out marginal rate of substitution of Sonia. How does marginal rate of substitution
vary as she consumes more of apples and less of bananas? Give reasons.
14. Explain consumer’s equilibrium condition with the help of indifference curve approach.
How a change in consumer’s income will affects his equilibrium?
15. Explain why a consumer will choose a market basket so that marginal rate of substitution
(MRS) equals price ratio.
16. A consumer spends all her income on food and clothing. At the current prices of P f = 10₹
and Pc = 5₹, she maximizes her utility by purchasing 20 units of food and 50 units of
clothing.
(a) What is the consumer’s income?
(b) What is the consumer’s marginal rate of substitution of food for clothing at the
equilibrium position?
17. Priya spends all her monthly income of ₹5000 on food and clothing. Price of food is ₹250
and the price of clothing is ₹100 and her monthly consumption of food is 10 units and
that of clothing is 25 units. With this consumption of the two commodities her marginal
rate of substitution of food for clothing is MRS
fc
=
1𝐶
1𝐹
. Is she in equilibrium with this
consumption? Which commodity she will substitute for the other to reach equilibrium
position? Illustrate diagrammatically with indifference curves.
18. What is income consumption curve. Draw indifference curve diagram showing the
income consumption curve in the following cases;
(a) Both X and Y are normal goods
(b) Good X is normal good and good Y is inferior
(c) Good X is inferior good and good Y is a normal good
19. Fill in the blanks in the following table:
Number of variable
inputs
3
4
5
6
7
Total output
(No. of units)
130
-
Marginal product of
the variable input
18
20
5
-
Average product of
the variable input
30
19.5
20. Consider the following data on output and inputs. What type of returns to scale does it
represent and why?
K
L
Q
5
8
3
10
16
6
20
32
12
40
64
24
21. You are given the following production function. Which ones represent constant returns
to scale, which one increasing return to scale and which one decreasing returns to scale
and why?
(a) Q = AK0.5 L0.7
(b) Q = AK 0.25 L0.75
(c) Q = AK0.3 L0.6
(d) Q = 10√𝐿 √𝐾
22. A firm has the following production function:
1
1
Q = 22 𝐿2
Calculate marginal product function for labor and capital. Also calculate MRTSLK.
What type of return to scale does it represent?