Business Economics

December 2021 Examination

Answer 1.

Introduction
Indifference curve: 

Indifference curve, in financial issues, graph showing different mixes of two things (if all
else fails purchaser things) that yield equivalent fulfillment or utility to an individual. Made
by the Irish-considered British financial master Francis Y. Edgeworth, it is thoroughly
utilized as an intelligent gadget in the examination of buyer lead, especially as identified
with purchaser demand. It is moreover used in government help money related issues, a
field that splendid lights on the impact of various activities on individual and general
flourishing.

Thought and application

Ideas of Indifference Curve

Idea I (non-satiety): It is ordinary that the purchaser will dependably incline toward a huge
load of a good to a seriously unassuming extent of that incredible gave the extent of
different merchandise available to him stays unaltered. The customer has not yet displayed
up at the indication of satiety in the utilization of any extraordinary.
Thought II (Ordinal Utility): It is without a doubt obvious that the buyer can rank his
propensities according as per the general inclination of every canister. He really need not
know definitively the extent of fulfillment.

Uncertainty III: The absolute utility of the purchaser relies on the proportions of the things
gobbled up U = f(q1, q2, … ., qx, qy, … ., qn)

Idea IV (Consistency and Transitivity of Choice): It is ordinary that the purchaser is

predictable in his decision, that is, if picks pack An over B, he won't pick B over An in
another period if the two gatherings are accessible to him.

Uncertainty V (Diminishing Marginal Rate of Substitution): It is recognized that as a

continually expanding number of units of X are fill in for Y, the buyer will really have to
surrender less and less units of Y, for each extra unit of X.

Considering above suppositions we may now explain the properties of indifference curves.

1. Indifference Curves are Downward Sloping

 Basically all indifference curves have a negative inclination. That is, they incline dropping
from left to right. The grade of the curve shows the speed of replacement between two
merchandise, for instance the rate at which a singular will surrender some proportion of
good A to get a more important proportion of good B. In case we recognize that the
specific inclinations the two things, the proportion of good B needs to increase as the
proportion of good A reductions, to keep the general degree of fulfillment the equivalent.
Since the two axes each address one of the two merchandise, this relationship accomplishes
a sliding slanting curve. This winds up being unquestionable in the event that we take a
gander at the indifference map under.

2. Higher Indifference Curves Are Preferred to Lower Ones

Customers will reliably lean toward a higher indifference curve to a lower one. This is a
result of the fundamental money related doubt that "more is for each situation better".
Think about it assuming someone some way or another figured out how to inquire
 regarding whether you really wanted a free cut of pizza or an entire pizza to no end, what
may you say? Who denies free pizza, right? By and by, clearly, it's not for the most part
that essential, but in principal financial theory, we can acknowledge that buyers have an
inclination for greater sums. This is reflected graphically in the indifference map. The
higher the indifference curves are, the greater the measures of the two merchandise. And
subsequently, the more ideal the curve becomes.

3. Indifference Curves Cannot Intersect

Two indifference curves can't cross. To understand the justification for why this is the
circumstance, we can perceive what may happen in case they met. As we likely know, all
mixes of good An and fair B that lie on a comparable indifference curve make the buyer
correspondingly happy. As such, if two indifference curves were to cross, both of them
would have to provide the purchaser with a comparative level of outright satisfaction,
because the particular point where they meet (i.e., point A) is on the two curves.
 Consequently, any remaining blends on the two curves would have to give a comparative
level of satisfaction moreover. Regardless, if we think about point B and point C, we can
see that point C offers a more prominent measure of good An and fair B (90 and 140) when
diverged from point B (80 and 130). As we already insightful above, customers reliably
incline toward greater sums. Thus the two curves can't give a comparable level of
satisfaction, which suggests they can never cross.

4. Indifference Curves are convex (i.e., bowed inward)

Overall, indifference curves are bowed internal. This has to do with the minor speed of
substitution (MRS). We realize that the minor utility of devouring a nice decreases as its
reserve fabricates (see furthermore reducing fringe utility). Consequently purchasers will
give up a more noteworthy measure of this extraordinary to get another incredible of which
they have essentially nothing. What about we look at the graph under to outline this. If a
purchaser has a huge load of good B, the MRS is 3 units of good B per unit of good A. If
 she has a more prominent measure of good A, the MRS is 0.5 units of good B per unit of
good A. With everything taken into account, in the event that they have a lot of good B,
they are more prepared to trade some of it to get an additional a unit of good A just as the
opposite way around. Because of this relationship, the indifference curve is bowed internal

(i.e., raised).

and increment inside the pleasure degree balance the total pride stage of a mixture. 
 
Conclusion

Indifference curves are outlines that address distinctive blends of two products which a singular
thinks about correspondingly significant. The hatchets of those charts address one thing each
(e.g., incredible An and respectable B). Indifference curves are comprehensively used in
microeconomics to examine purchaser inclinations, the effects of sponsorships and charges, and
a few distinct concepts. Notwithstanding the way that they come in many shapes and sizes, most
of them share several critical properties.
Answer 2.

Introduction
The adaptability of demand: Elasticity of demand is a critical minor takeoff from demand.
Demand can be appointed adaptable, inelastic or unitary. An adaptable demand is one in which
the adjustment of sum demanded on account of an adjustment of cost is tremendous. An inelastic
demand is one in which the adjustment of sum demanded in light of an adjustment of cost is
pretty much nothing.

Thought and application:

Worth adaptability of demand: Elasticity of demand is displayed in Figure 1. Note that an

adjustment of significant worth brings about a tremendous change in sum demanded. A
representation of things with an adaptable demand is buyer durables. These are things that are
purchased once in a while, like a garments washer or a vehicle, and can be postponed if esteem
rises. For instance, automobilerebates have been incredibly compelling in expanding vehicle
bargains by lessening cost. Close substitutes for a thing influence the adaptability of demand. On
the off chance that another thing can without a very remarkable stretch be fill in for your thing,
customers will quickly change to the following thing if the expense of your thing rises or the
expense of the other thing rots. For instance, cheeseburger, pork and poultry are all meat things.
The declining cost of poultry of late has made the use of poultry increment, to the burden of meat
and pork. So things with close substitutes will as a general rule have adaptable demand.

• The PED is the rate change in sum demanded due to a one percent change in cost.

• The PED coefficient is ordinarily negative, disregarding the way that financial experts as
often as possible ignore the sign.
• Demand for a good is by and large inelastic if the PED coefficient is shy of what one (in
inside and out worth).

• Demand for a good is by and large adaptable if the PED coefficient is more prominent
than one (in altogether worth).

• Demand for a respectable is unit adaptable when the PED coefficient is comparable to
one. 

Percentage change ∈quantity demanded

Price elasticity of demand=
Percentage change∈the price of the product

Price elasticity of demand (Ed)=(−)QP×△P△Q

Here,P=Rs.4; P1=Rs.5;
△P=P1−P=Rs.5−Rs.4=Rs.1
 Q=25 units ; Q1 = 20 units ; $$
△Q=Q1−Q=(20−25) units = (−)5 units
Ed=(−)254×1−5
=0.8.
 
Conclusion

Adaptabilities can be advantageously disconnected into five general classes: completely flexible,
adaptable, absolutely inelastic, inelastic, and unitary. An adaptable demand or adaptable supply
is one in which the adaptability is more prominent than one, showing a high responsiveness to
changes in cost. An inelastic demand or inelastic supply is one in which flexibility is shy of what
one, showing low responsiveness to esteem changes. Unitary versatilities exhibit relative
responsiveness of either demand or supply.
Answer 3a.

Introduction

The cross adaptability of demand: The cross flexibility of demand is a financial thought that
activities the responsiveness in the sum demanded of one extraordinary when the expense for
another incredible changes. Similarly called cross-esteem adaptability of demand, this
assessment is determined by taking the rate change in the sum demanded of one extraordinary
and partitioning it by the rate change in the expense of the other incredible.

Thought and application

• Cross adaptability of demand: The cross adaptability of demand is a financial thought

that activities the responsiveness in the sum demanded of one incredible when the expense for
another extraordinary changes.

• The cross flexibility of demand for substitute merchandise is reliably certain considering
the way that the demand for one incredible increments when the expense for the substitute
extraordinary increments.

• Alternatively, the cross flexibility of demand for corresponding items is negative.

a) In the gave situation the cross adaptability of demand is positive of the given items, that is the
explanation merchandise are substitute merchandise.

Substitute Goods

The cross adaptability of demand for substitute items is reliably certain considering the way that
the demand for one extraordinary increments when the expense for the substitute incredible
increments. For instance, if the expense of coffee expands, the sum demanded for tea (a
substitute reward) increments as customers change to a more reasonable yet substitutable other
choice. This is reflected in the cross adaptability of the demand formula, as both the numerator
(rate change in the demand of tea) and denominator (the expense of coffee) show positive
increments.

b) Now, it is given that there may be a 5% climb in the expense of 1 thing with 1.2 cross
flexibility of demand, and we should ascertain the adjustment of the aggregate demanded of
another product while holding various components consistent. For this reason, we can use the
accompanying formula,

Percentage change ∈quantity demanded( X)

Cross Elasticity of Demand=
Percentage change ∈the price of other goods(Y )

∆Q X
Percentage change ∈quantity demanded= x 100
QX

∆ PY
Percentage change ∈ price= x 100
PY

Where,

∆ Q X is the change in quantity demanded of commodity X

Q X is the quantity demanded of commodity X

∆ P X is the change in the price of commodity Y

P X is the price of commodity Y

Percentage change ∈quantity demanded ( X )

1.2=
5%

Percentage change in quantity demanded = 6%

 
Conclusion

A negative cross flexibility of demand indicates that the demand for great A will diminish as the
cost of B goes up. This recommends that An and B are corresponding merchandise, like a printer
and printer toner. If the cost of the printer goes up, demand for it will drop. Because of less
printers being sold, less toner will likewise be sold. However, here the cross versatility is
positive.
3.b.

Quantity Consumed Total Utility

1 20

2 35

3 47

4 55

5 60

Answer 3b.

Introduction

Utility: Average Utility is that utility where the absolute unit of utilization of merchandise is
separated by number of Total Units. The Quotient is known as Average Utility. For instance—If
the Total Utility of 4 bread is 40, then, at that point, the normal utility of 3 bread will be 12 if the
Total Utility of 3 bread is 36 i.e., (36 ÷ 3 = 12).

Idea and application

• Marginal utility: Marginal utility is the additional fulfillment a purchaser gets from
having another unit of a decent or administration.

• The idea of marginal utility is utilized by financial experts to determine the amount of a
thing customers are willing to buy.

• The law of diminishing marginal utility is frequently used to justify moderate

assessments.

• Marginal utility can be positive, zero, or negative.

. The recipe for calculating marginal utility is,

 
Change∈total utility
Marginal Utility=
Change∈quantity consumed

 
Average utility: Average Utility is that utility in which the total unit of consumption of goods is
divided by number of Total Units. The Quotient is known as Average Utility. For example—If
the Total Utility of 4 bread is 40, then the average utility of 3 bread will be 12 if the Total Utility
of 3 bread is 36 i.e., (36 ÷ 3 = 12). 
 
Total Utility
Average Utility=
Quantity Consumed

For 1 unit,
Average Utility = 20/1 = 20

Marginal Utility = (20-0)/(1-0) = 20

For 2 units,

Average Utility = 35/2 = 17.5

Marginal Utility = (35-20)/(2-1) = 15

For 3 unit,

Average Utility = 47/3 = 15.67

Marginal Utility = (47-35)/(3-2) = 12

 
In the same way, we can calculate the marginal utility and average utility for the following two
consumption levels of the consumer. 

Quantity Consumed Total Utility Average Utility Marginal Utility

1 20 20 20

2 35 17.5 15

3 47 15.67 12

4 55 13.75 8

5 60 12 5

 
 
Conclusion
From the above discussion, we can conclude that utility is the satisfaction power of a
commodity. Having said that, different consumers are different, and it is not true that an addict
will ever enjoy himself to the fullest, regardless of the amount of cocaine he may consume. Non-
addicts, by contrast, will obtain some level of satisfaction within quite a short period of time.
Also, the satisfying power of a commodity does not prove its usefulness. To conclude, we can
say that utility is psychological in nature and cannot be measured objectively.