ROLL NO.

B28
ABDUL RASOOL KHAN,
SECTION 1002B
DATE:30:08:2010
(ASSIGNMENT OF MANAGRIAL ECOMONICS)

Q1:Rohan consumes two commodities, wheat and rice. The

marginal utility derived by him from rice is two and half time the
utility derived from the marginal utility of wheat. If wheat is
available for Rs.12 /kg, what price will he be willing to pay for
rice in order to maximize his utility?

ANSWER:Let MU of wheat=x

Price of wheat(p1)=12

Then MU of rice =5/2(given)

Price of rice (p2)=?

We know MUx/p=MUx/py

x/12=5/2*x/p2

p2x=5/2x*12

p2x=60/2x

there for p2=30

hense the price of rice is 30

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Ques.2 The fundamental economic problems of what to produce,
how to produce and for whom to produce are solved differently
by different economic systems. Discuss how a capitalist
Economy solves

• ANSWER:A: Capitalism economy otherwise called free

market economy is an economic system based upon private

property and the market in which, in principle, individuals
decide how, what, and for whom to produce. Under capitalism:
a.More private participation in the field of economic activities;

b.Free environment to compete in the economy;

c.Individuals and firms act for profit motive;

d.High freedom for choice to the consumers;

e.Government acts as a police stat

f. Individuals are encouraged to follow their

own self-interest, while market forces of
supply and demand are relied upon to
coordinate those individual pursuits.
g. Markets work through a system of rewards
and payments.
h. Individuals are free to do whatever they
want as long as it is legal.
i. Fluctuations in prices coordinate individuals'
wants.

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j. The primary debate among economists is not
about using markets; it is about how markets

Q3;Tomatoes and potatoes are available for Rs. 7/kg and Rs.
10 /kg respectively. If you have an income of Rs. 35000, draw the
budget line as graph.

ANSWER:INCOME=35000

TOMATOES=rs7

POTATOES=rs10

TOMATOES=35000/7=3500

POTATOES=35000/10=3500

THAT IS BUDGET LINE HERE:

And income spend on potatoes = PP/ I =35000/10

y 5000 =Rs. 3500

4000

3000

2000 (Budget line)

1000

0 x
1000 2000 3000 3500 4000 5000

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Q4:Suppose you are the manager of California winey. How
would you expect the following events to affect the price you
receive for a bottle of wine?

a. The price of French wines decreases

b. One hundred new wineries open in California

c. The unemployment rate in USA decreases

d. The price of cheese increases

e. The price of a glass bottle increases significantly due to

government anti-shatter regulations

Answer:when I am manager of the California winey it may be I

will right or not if A:the price of French wines decrease,I
woluld like to decrese the price of my wine per bottle
because customers want also low price rather then me.

B:if one hundred wineries open in California

mywine per bottle price also decrese because there were so
compitater if I want to stable in market I would like to
decrese price.

C:if unemployment rate is decrease then no

effect on my price if I want I will increase the price.

D:If cheese price is increase no effect on price.

E:yes if the bottle price is increase I will

increase wine price because I don’t take lose I want cost
analyse and take action

Q5):-Other things being the same what would happen to the

supply of a particular product if
a. price of the product decreases
b. a technological breakthrough enables the good to be
produced at a significantly lower cost

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 c. the price of inputs used to produce the product increases
d. the price of substitute commodity decreases
e. the managers of the firms that produce that good expect
the rise in price of that product in near future.
Ans:- a) If Price of a product decreases,the supply of the
product should also decrease(contract).
b) The supply should also decrease.
c) The supply will also increase.
d) The supply will also decrease.
e) The supply will increase.

Q6):-A) What is income consumption curve? Draw income

consumption curve for a normal and inferior goods.
B) Suppose the supply curve for allu tikki passes through the
point P= Rs.25 and Qs=500. Give two interpretations of this
point on the supply curve.

Ans:-A)In economics, the income effect is the change in

consumption resulting from a change in real income.
With a higher income, there will be a new budget constraint line
that intersects a higher indifference curve. The income-
consumption curve is the intersection of the points of tangency
of the sets of budget constraint lines and indifference curves.
In consumer theory, an inferior good is a good that decreases
in demand when consumer income rises, unlike normal goods, for
which the opposite is observed.[1] Normal goods are those for
which consumers' demand increases when their income
increases. [2] Inferiority, in this sense, is an observable fact
relating to affordability rather than a statement about the quality
of the good. As a rule, too much of a good thing is easily
achieved with such goods, and as more costly substitutes that
offer more pleasure or at least variety become available, the use
of the inferior goods diminishes.

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 Depending on consumer or market indifference curves, the
amount of a good bought can either increase, decrease, or stay
the same when income increases.
.

Good Y is a normal good since the amount purchased increases

from Y1 to Y2 as the budget constraint shifts from BC1 to the higher
income BC2. Good X is an inferior good since the amount bought
decreases from X1 to X2 as income increases

Q7:-In 2003, the Men`s Hair company increased the price of its
shampoo and subsequently sold more shampoo than 2002. Is
the demand curve for this company positively sloped? When the
demand curve slopes positively? Give an example of a product
in whose case demand curve slopes positively and also explain
the exceptions of law of demand.
Ans.Yes,the demand curve for this company is positively
sloped because there is positive relationship between demand
and supply.
When the demand curve is positive,slope due to increase in
price,price is also increase.

Exceptions to the law of demand:-

Giffen Goods:-The case of Giffen goods needs a little of story
telling!In early Ireland,it was observedthat the poor population
consumed two goods:meat(which was costly)and bread (which

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was cheap).a very strange phenomenon was observed when the
price of bread was increased,it made a large drain on the
resourses of the poor people and raised their marginal utility of
money to such an extent that they were forced to curtail their
consumption of meat and buy more of bread,which was still the
cheapest food.This impilied that quantity demanded of bread(an
inferior good)increased with increase in its price.
Snob Appeal :-Opposite to Giffen goods,there are certain goods
which have snob value,for which the consumer measures the
satisfaction derived from these commondities not by their utility
value,but by social status.the consumers of this particular
commmondity want to show it off to others,and as a result they
buy less of it at lower prices and at higher prices.Thus in
case.price and quantity move in same direction.

Q:8 Shweta spends her whole weekly food allowance of $42 on

Pizza and soft drinks. The price of single pizza is $2 and of soft
drinks is $1.Shweta buys 12 pizzas and 18 soft drinks and her
marginal rate of substitution between pizza and soft drinks is 1.
Is Shweta in equilibrium? Explain.
ANSWER: $42=SOFT DRINKS,PIZZA
PIZZA=$2PER
SOFT DRINK=$1PER
12*2=24
18*1=18
TOAT=$42
AND OTHER SIDE 14*2=28
14*1=14
TOTAL=$42

Q9:- Suppose that a study has found that the price elasticity of
demand for subway rides is 0.7 in Washington D.C., and the mayor
wants to cut the operating subway system. Should the mayor
contemplate increasing or decreasing the price of subway ride. Why?
Ans:-Yes ,the mayor should contemplate to increase the price of
subway because increase in price is more necessary to
decrease the demand.
Hence contemplate of increase in price will leads to increase
revenue.

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Q10:-The price of chocolate is Rs.10 and you have to analyze the
consumer behavior under cardinal utility analysis. By the assumption
of constant marginal utility of money show the consumer equilibrium
with the help of table and diagram.
Ans:-Consumer equilibrium=MUx/Px=MUm.
Where MUx=mariginal utility of x ,px=price of x and MUm=marginal
utility of money.
Given:-price of chocolate=Rs 10
MUm=constant I,e.=1
Substituting there values=MUx/10=1.
MUx=10.

Price E=equilibrium
10 Px

Q11.. You are working for coca-cola as the market head. The
company is planning to float a new drink which is white in
colour. What lessons from the concept of elasticity can you
draw while fixing the price for this new drink?
Ans:-There are various methods while fixing the price for this
new drink:-
1.Perfectely Elastic Demand :-This is one extreame of the
elasticity range,when elasticity is equal to infinity.In this
case,unlimited quantities of the commodity can be sold at the
prevailing price and even a negligible increase in price would
result in zero quantity demanded.
2.Higly Elastic Demand:- When proportionate change in quantity
demanded is more than a change in price,the commondity is
regarded to have a highly elastic demand.In otherwords,ep > 1(in
absolute terms),such that a proportionate change in quantity
demanded is more than a proportionate change in price.

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3.Unitary Elastic Demand:-When a given proportionatechange in
price brings about an equal proportionate change in quantity
demanded,then demand for that commondity is regarded as
unitary elastic.In otherwords,ep=1.
4.Relatively inelastic demand :-when change in quantity
demanded is found to be offset by change in its price,then the
commondity has a relatively inelastic demand.In
otherwords,ep<1.
5.Perfectly Inelastic Demand :-In this case the quantity
demanded of a commondityremains the same,irrespective of
any change in the price,i.e,quantity demanded is totally
unresponsive to change in price.

Q12.If we do not have scarce resources, will we have a law of

demand? Will we observe price rationing for goods? Give your
arguments.

Ans:-Scare Resourses:-These are those resources which have

more demand than there supply.Example of scare resources is
petrol.
If we do not had scare resources the law of demand
will not be applied.As we know the law of demand is applied
when we have scare resources.
No,there will be no price rationing of goods because
scare resources are not scare.Fixing of price is due to force of
demand,supply or according to government rules as the
resources are not scare from both the things are not apply.

Q13:-For each of the following ,state whether economists would

consider it as a resource and if they would identify which of the
four types of resources the item is
a. A computer used by CBI agent to track the whereabouts of
suspected criminals.
b. The office building in which CBI agent works
c. The time that a CBI agent spends on a case
d. A farmer’s tractor
e. Crude oil
f. A package of frozen vegetables

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g. plastic bags used by a company for holding its products
Ans:-a) man-made resource as computer is made by man.
b)man-made resourse as office building is made by man.
c)time is not the resourse.
d)man made resource.
e)Natural resourse.
f)man-made
g)man made.

Q.14 A publishing company plans to publish a book .From the

sales of data of other publishers of similar books, it works out
the demand function for the book as Q=5000-5p. Find out-
a)Demand schedule and demand curve
b)no. of books sold at price Rs. 25
c)price for selling 2500 copies
d)price for zero sales

e)point elasticity of demand at price Rs.20

ANSWER: A) Demand schedule:-
Price QuantityDemand
100 4500

200 4000

300 3500

400 3000

500 2500

Demand curve:-
y

500

400

300

200

100

10
 0
1000 2000 3000 4000 5000 x

B:- Q = 5000 - 5p
Q = 5000 – 5(25)
Q= 5000 – 175
Q= 4825

C:- Q = 5000 – 5 (p)

2500=5000 – 5(p)
-2500 = - 5(p)
2500/5 = p
500 = p
Hence price = 500.
D:- Q = 5000 – 5 (P).
Q = 5000 – 5 (500)
Q= 5000 – 2500.
Q= 2500.

E:- Q=5000 – 5 (20)

Q= 5000 – 100.
Q = 4900.

Q15:A domestic servant spends his total income only on two

goods, food and clothing. Analyze the effect of increase in his
income on consumption of food and clothing. Illustrate the
derivation of his Income Consumption Curve.

ANSWER:If a domestic servent spends his total income on

goods,food and clothing.if his salary is increase he will
more purchase cloth more goods and take healthy food may
be he can use his money to other work and uses like,he can
purchase a bike and where he have take light food after
salary increment he use to take the junk food and use
restaurant rather then home.so salary or income increment
increase the living standred and other thing.

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