ROLL NO. B28ABDUL 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)=12Then MU of rice =5/2(given)Price of rice (p2)=?We know MUx/p=MUx/pyx/12=5/2*x/p2p2x=5/2x*12p2x=60/2xthere for p2=30hense the price of rice is 30

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

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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. 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=35000TOMATOES=rs7POTATOES=rs10TOMATOES=35000/7=3500POTATOES=35000/10=3500THAT IS BUDGET LINE HERE:

And income spend on potatoes = PP/ I =35000/10 y 5000 =Rs. 3500 4000

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3000 2000 (Budget line) 1000

0 x 1000 2000 3000 3500 4000 5000

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

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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 costc. the price of inputs used to produce the product increasesd. 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

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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.

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

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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.

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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 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?

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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.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 10MUm=constant I,e.=1Substituting there values=MUx/10=1. MUx=10.

Y

Price E=equilibrium 10 Px

X

Q

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.

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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.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 isa. A computer used by CBI agent to track the whereabouts of suspected criminals.

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b. The office building in which CBI agent worksc. The time that a CBI agent spends on a cased. A farmer’s tractore. Crude oilf. A package of frozen vegetablesg. plastic bags used by a company for holding its productsAns:-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 curveb)no. of books sold at price Rs. 25c)price for selling 2500 copiesd)price for zero sales

e)point elasticity of demand at price Rs.20ANSWER: A) Demand schedule:-

Price QuantityDemand100 4500

200 4000

300 3500

400 3000

500 2500

Demand curve:- y

500

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400 300 200

100

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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