Question

Q1. Suppose consumer consumes two goods, X and Y. The price of X is P x , price of Y is P Y
and the consumer income is m.
a. Derive and interpret the budget constraint and its slope.
b. If slope is -3, how will you interpret it?
c. Suppose a government wants to discourage the excessive consumption of X and
decides to impose a tax t 1 if someone consume more than X 1 but less than X 2 and
imposes a higher tax t 2 if consumption exceeds X 2 . However consumption of X is not
allowed to exceed the level of X 3 . Derive budget constraint and explain with logic.
(Note: X 1 < X 2 < X 3 and t 1 < t 2 )

Q2: a. Derive indifference curve in case if both the commodities are “bad”. Explain your

answer logically?
b. What happens to the shapes of indifference curve if (i) a consumer’s preferences
are not “Transitive”? (ii) If an assumption of “No-satiation” is violated?
c. Explain the meaning of MRS. What is the meaning of MRS of good 1 for 2 is -
2.5?

Q3: Consider a Cobb-Douglas Utility Function
a. Find marginal utility of Y. Does marginal utility of depend on the level of
consumption of X? how do you know? Explain
b. Find slope of the indifference curve.
c. Find MRS and draw the indifference curve for above function.

Answer 1

classmate Q12 Income-M Date Page Price of R=be Price of y = ly a) Budget constraint Pax + ly Y = M. The budget constraint shows what a consumer can afford to spend with his guven Income and prevailing prices. There is a kind of constraint because he cannot spend more than his given Income Sope: It is negatively sloped because to buy more of a good the consumer has to buy less of good Scope of budget line is ratio of prices of two goods = f (good) Pl good a) b) Slope other -3 3 Price of good 1 Price of good ? 2. Thus, we can conclude that price of good I was 3 times higher than frice of good 2 c) with the imposition of tax, the price of that good rises by t the amount of tax. X < X <X2 (Patti) x + PyY=M (Pettz) x + PyY=M X2 < X < X 3 So, this can be interpreted as if x lies between X and X2, price wes by ts , except this equation remains same Similarly if price use by tz, quantity of x must be in between X2 and 43. Scanned by TapScanner