Business Economics

June 2022 Examination

Q1. Assume that a consumer consumes two commodities X and Y and makes five
combinations for the two commodities:

TABLE BELOW

Combination Units of X Units of Y

A 25 3

B 20 5

C 16 10

D 13 18

E 11 28

Calculate Marginal rate of Substitution and explain the answer. (10 Marks)

Ans 1.
Introduction:
Each business works upon the responses it receives from its clients. The extra the clients will like
its products and services, the extra sales it'll generate, and the more market share. In economics,
it is known as the pleasure that a client derives from consuming any product. Consequently,
there's a sheer requirement that the producers choose a particular method to measure this delight
to work accordingly to gain a far larger market share. There are, thus, diverse methods to
measure this stage of satisfaction, one among which is the Indifference Curve.

Concept & Application:

Marginal rate of substitution:

In any marketplace, there are various items for the consumer's benefit. The goods may be
homogenous or heterogeneous. Every proper is made for intake by using the client. The patron
can compare the goods on various bases, determining which product will deliver him more
satisfaction. After all, the complete sport in economics production and consumption is the client's
pleasure. Something items will fulfill the consumer more significant, the greater will be the
demand for that product, and the greater the call for, the greater would be the production of that
product and the extra the manufacturing, the more could be revenue generation, and
subsequently, the market equilibrium might be maintained as an advanced marketplace alongside
the final GDP. This analysis lacks many within your means aspects that could help increase the
market's GDP. The idea for this satisfaction precept is utility. Utility refers to the diploma of
pleasure or satisfaction a person will receive from doing a financial activity. Within the instant
case, it will be the pleasure or the delight that one customer will benefit from eating the goods.
For instance, if a purchaser purchases a hamburger to relieve hunger pangs and enjoy a tasty
meal, the intake of that hamburger will refer to gaining some utility.

The marginal substitution price refers to the number of goods a customer is inclined to another
top. This principle works at the precept that the utility or the pleasure derived out of the intake of
each product is equal or equal. The marginal substitution price is used inside the evaluation of
the indifference curve. The indifference curve is one of the ordinal strategies for measuring the
consumers' utility. On this, the customer's pleasure level from the two given groups is assessed.
Then at every point, it's far located that the pleasure level of the consumer stays equal. The
instant the purchaser begins consuming more than 1 product; it will reduce the intake of the
alternative and vice versa. That is how a consumer can divide its software and satisfy its pride
from the two to be had products to devour.
The indifference curve is a poor slope: it's miles due to the Marginal charge of Substitution that
the indifference curve has a bad slope. It’s far the ratio between the marginal utilities of two
commodities. it is expressed as: MRS x,y = – ΔY /ΔX = MUx/MUy. With the rise inside the
consumption of precise A, the consumption of appropriate B decreases. There's a diminishing
marginal fee of substitution, which has a resultant effect on the terrible slope.

Combination Units of X Units of Y

A 25 3

B 20 5

C 16 10

D 13 18

E 11 28

For combination A, the MRS is 25/3,

= 8.33
For combination B, the MRS is -5/2
= -2.5
For combination C, the MRS is -4/5
= -0.8
For combination D, the MRS is -3/8
= -3.7
For combination E, the MRS is -2/10
= -0.2

Its miles to be mentioned that the Marginal price of Substitution is poor due to the negative slope
of the indifference curve. It is because as quickly as you start increasing the consumption of 1
good, say X. You will start diminishing the consumption of the some other true, say Y. it's so
due to the fact the extent of or amount of pleasure being performed at all of the points or any of
the factors over the curve is same.

Conclusion:

There are ordinarily methods through which the satisfaction/ utility of the client can be
measured, the cardinal and the ordinal strategies. The cardinal strategies are primarily where the
pride is measured in phrases of numerals/ numbers. The opposite method is the ordinal approach,
in which the utility is measured in phrases of ranking. The indifference curve is one of the
ordinal methods of measuring the utility of the purchasers. On this, the customer's delight stage
from the two given communities is assessed. Then at each point, it is found that the satisfaction
stage of the consumer remains identical. The moment the consumer starts ingesting extra than 1
product, it'll reduce the amount of consumption of the other and vice versa. That is how a
customer can divide its application and satisfy its pride from the two available products to
devour.

Q2. Elaborate the term Total Revenue and Marginal revenue also calculate TR and MR in
the given table (10 Marks)

Price Output (In Units ) Total Revenue Marginal

20 1
18 2
16 3
14 4
12 5
Ans 2.
Introduction:
Sales are the income generated using the company or an organization from the sale of a good or
provider by the manufacturer to its customers. Technically, sales are calculated by multiplying
the commodity's price by the amount of the product. In monetary phrases, a firm tries to provide
an increasing number until the marginal revenue of the goods is greater than the product's price.
It suggests that the manufacturer can cover its standard variable value, it approaches that the
manufacturer is at an earnings-making stage, and hence, he can retain the production for the
future. The profit-making business is the remaining reason for any producer.

Concept & application:

TOTAL REVENUE, MARGINAL REVENUE:

Overall sales refer to the earnings generated using the producer from the total manufacturing of
all the gadgets. The full sales can be computed as the multiplication of the commodity's price and
the amount produced by the producer. This can be written as:

TR = P * Q; where
P= price of the commodity
Q= quantity supplied of the product
TR= total revenue

It prefers not to the charge calculated by combining the costs of all the factors, but it is the fee
price inclusive of the internet or gross profit through the manufacturer. Best then, we'd be
capable of computing the actual general sales. The sales consist of each cost price and the
earnings margin via the producer. The profit may be computed later. In any other case, the
computation of general revenue shall be disturbed.

Marginal revenue, however, is the revenue or the income that the producer will gain from
generating each extra unit. it is calculated beyond the production done at the manufacturing of
the primary product. E.g., the sales that the manufacturer could be getting from generating an
extra unit of the textiles would be referred to as a marginal product.

It is computed as:
MR= change in TR from each extra unit produced/ exchange in several portions produced.

The ultimate motive of any firm or enterprise is to make earnings. The more the profit, the more
the sustenance of the producer in the longer term. When a company’s output is such that
marginal sales and marginal value for the last unit produced are the same, that firm is said to be
maximizing its profits.

In easy terms, it's far the revenue generated from the producer's sale of the additional unit. The
usage of marginal revenue is completed by way of the advertising managers group to recognize
the call for the consumers, plan the marketing schedules, and set the product prices. In financial
terms, a firm tries to supply more and more until the marginal revenue of the products is more
than the product's price. As it indicates that the producer can cover its standard variable cost, it
method that the producer is at an income-making stage. Consequently, he can hold the
manufacturing for destiny. The income-making commercial enterprise is the last reason for any
manufacturer.

Marginal
Price Output (In Units ) Total Revenue
Revenue

20 1 20 20

18 2 36 16

16 3 48 12

14 4 64 16

12 5 60 -4
Here, in the above desk, it is evident that as quickly as the total revenue begins decreasing, the
marginal revenue turns poor. We should be aware that it's far impossible for total sales to get 0
because neither the rate nor the quantity produced in general surroundings may be 0. but, the
marginal revenue maybe 0 or even poor depending upon the revenue generated from the
production of every additional unit. If the revenue generated at two prices with exceptional
commodities is identical in accounting years, the marginal revenue might be zero. However, if
because of any internal or external factors, the production procedure receives reduced and the
rate of the commodity also decreases, the revenue era could be decreased. As a result, making
the marginal revenue goes into the negatives. So, the graph of total sales shall constantly remain
high-quality. However, the graph of marginal revenue may be positive, zero, and even poor.

Conclusion:

Total sales refer back to the manufacturer's income from the entire production of all of the units.
The whole sales can be computed because of the multiplication of the rate of the commodity and
the quantity produced by the manufacturer. Marginal sales, then again, is the revenue or the
income that the producer will benefit from producing each additional unit. Its miles are
calculated past the production performed on the production of the primary product.

3.a. From the given Demand Schedule for air tickets, calculate elasticity of demand. (5
Marks)

Price of Air Ticket Quantity Demanded (Tickets per month)

(Per Ticket)

1,00,000 5,000

1,20,000 3,500
Introduction:

Demand is a negative observation concerning the charge, i.e., every time the charge of
commodity changes, it additionally modifications its demand. That's a terrible trade. The degree
to which that trade has to arise is determined through the rate elasticity of demand. Price
elasticity of demand is a vital idea of the law of demand. Its miles a critical advertising exercise
for predicting how consumers respond to a one-of-a-kind shape of stimulus. Charge elasticity of
demand, as it is popularly called, is a financial dimension of how the amount demanded is
suffering from modifications in its rate.

Concept & Application:

Elasticity of demand:

Price Elasticity of demand is an economic idea used to determine the degree to which any
alternate has been added up inside the demand of the commodity while there is a charge
alternate. It is used for maintaining the marketplace equilibrium, and the producer is also helped
by way of it so that they may produce handiest the one's goods that show much less elasticity. It
often depends upon the nature of products, i.e., high-priced goods, essential goods, substitute
goods, or complementary items.

In economics, there are five ways of degree wherein any trade may be delivered in the demand of
a commodity.

Substitute items are the ones that are used or consumed in the region of one another. For
example, tea and coffee. When the charge of tea increases, the consumer will shift to devour
espresso and vice versa.
However, complementary items are items that might be consumed collectively, e.g., bread and
butter. After the bread rate increases, the demand for butter can even reduce and vice versa.

There are ordinarily five forms of rate elasticity of demand:

1. Unitary Elastic (ed=1)

2. Highly Elastic (ed >1)
3. Highly Inelastic (ed < 1)
4. Perfectly Elastic (ed= infinity)
5. Perfectly Inelastic (ed=0)

In the instant case, price elasticity of demand can be computed as:

When the price is 1, 00,000, the demand is for 5000 units;
When the price rises to 1, 20,000, the demand reduces to 3500 units.
The price elasticity can be computed as:
Ed = % change in Quantity demanded/ % change in price
   = (-) 30%/ 20%
   = - 1.5

Conclusion:

Price elasticity of demand acts as a measuring unit within the hands of the producer if you want
to suggest in what quantity they need to supply the given product. The terrible sign within the
immediate case suggests the negative slope of the demand curve. The ed is -1.5, which is less
than 1, which means that the product is high prices inelastic in nature. A moderate upward thrust
inside the charge has brought a greater significant trade in the amount demanded of the product.

3.b. Elaborate the term Elasticity of Supply and explain any three factors that determines
elasticity of supply (5 Marks)

Introduction:
The elasticity of supply refers to the ratio of percent trade-in amount furnished with the share
exchange inside the rate of the commodity. It refers to the responsiveness of the quantity
supplied regarding the alternate inside the rate of the commodity.

Concept & Application:

Elasticity of supply:

The elasticity of delivery refers to the ratio of percent alternate in the amount supplied with the
percentage change inside the commodity's price. It refers back to the responsiveness of the
quantity provided concerning the alternate price of the commodity. It could be computed as:

Es= % change in quantity supplied/ % change in price 

It needs to be referred to that the significant issue affecting the quantity provided of any
commodity is the charge of the personal commodity. That’s why it is referred to as rate elasticity
of supply.

Factors for determination of elasticity of supply:

The following elements play a first-rate function in figuring out the price elasticity of supply:

1. The number of producers: The number of producers in the market/ industry of the
homogenous product perform a vital function within the determination of supply. If the market
has more producers, it will cause competitiveness. Therefore the charge of the commodity needs
to be reduced to increase the delivery so that the consumer base may be attracted. But, if there
are fewer manufacturers, the price change could be significantly much less.
2. Factor Mobility: It refers to the reality that if it is simple to shift the thing sources within
the market, the rate elasticity of supply might be extra. However, if the aspect mobility is less
within the market, the deliver elasticity could be inelastic.

3. The period of more training: If a firm invests inside the capital, the supply is more
elastic when the rate increases.

4. Ease of storage: if the produced good is simple to shop, it shall have extra elasticity, and
if the product is perishable, it shall have less elasticity.

5. Government Subsidies: if the authorities are supplying subsidies to the producers for the
manufacturing of positive items, the elasticity of supply would be greater elastic, and if there
could be no subsidies, the elasticity of supply would be much less.

Conclusion:

Elasticity refers to the responsiveness of demand or delivery concerning the price of the own
commodity. Inelasticity of delivery, the quantity provided of commodity changes with a
percentage change in the rate of the commodity.