integrated programme in management, Microeconomics

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1. Suppose we observe that the price of soyabeans goes up while the quantity of soyabeans sold goes up as well. Use the supply and demand curves to illustrate two possible explanations for this pattern of price and quantity changes.

2. Explain why the price elasticity of demand for a product such as 'yogurt' is likely to be less negative than the price elasticity of demand for an 'Amul yogurt'.

3. Chinese checkers (CC, a board game) are produced and sold in a competitive market. When there is no tax on the product, the equilibrium price is Rs. 100 per CC. The point elasticity of demand is about -0.9 and the point elasticity of supply is about 1.2. In commenting on a proposed excise tax of Rs. 10 per CC, a newspaper article states that "The tax will probably drive the price of a CC up by Rs. 10". Is this a reasonable conclusion? Explain.

4. Natasha usually pays a price between 5 rupees and 7 rupees per ice cream. Over this range of prices, her weekly total expenditure on ice cream increases as the price decreases. What does this imply about Natasha's price elasticity of demand for ice cream? Explain.

5. A consumer has Rs.50 per week to spend on either commodity X, whose price is Rs.5, or commodity Y, whose price is Rs.4. For each of the four cases below, indicate whether or not this consumer is "at equilibrium," i.e., deriving the maximum-attainable satisfaction by spending all of his/her income. If you lack sufficient information to answer, explain why. If you know the consumer is not at equilibrium, indicate the required direction of movement (e.g., "buy more of X and less of Y," "buy less of X and more of Y," "buy more of both," etc.):

a. Purchases are now 2 of X and 10 of Y. Total utility of X at this level is 500 utils; total utility of Y is 400 utils

b. Purchases are now 6 of X and 5 of Y. Total utility of X at this level is 400 utils, and the marginal utility of X is 60 utils. Total utility of Y is 800 utils, and the MU of Y is 30 utils.

c. Purchases are now 6 of X and 5 of Y. The MU of X at this level is 25 utils; the MU of Y is 20 utils.

d. Purchases are now 6 of X and 4 of Y. The MU of X at this level is 25 utils; the MU of Y is 20 utils.


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