Principles of Microeconomics

Generic Elective – BA/B.Com (Prog.) V Semester

Assignment

1. State whether true, false or uncertain. Also explain.

a) Demand is relatively elastic when price and total expenditure on the good move in
the same direction.
b) If a consumer faces a zero price for good X, the budget line is parallel to x-axis.
c) Indifference curves are negatively sloped because more is preferred to less.
2. Why don’t two indifference curves intersect each other?
3. Why are ICs convex to the origin?
4. My marginal rate of substitution between a round of golf and a game of tennis is 6.
Which is more valuable to me and why?
5. Price of Y is Rs. 3 per unit and price of X is Rs. 6 per unit and consumer’s income is Rs.
3000. The consumer spends his whole income on X and Y. What is MRSXY at the
consumer’s equilibrium.
6. Ram and Shyam like Vanilla and Chocolate ice-cream but Ram’s favorite is vanilla while
Shyam’s favorite is chocolate. Using the concept of marginal rate of substitution, explain
Ram’s indifference map for vanilla and chocolate ice cream will be different from
Shyam.
7. Consider a consumer who consumes only two goods namely flour and potatoes. Potatoes
are an inferior good. Can flour also be inferior good? Explain. If the price of flour falls,
illustrate the impact on the consumption of flour and potatoes using income and
substitution effect.
8. Draw the indifference map for the following cases:
a) Consumer A always consumes tea and sugar in a fixed proportion. She adds two
spoonfuls of sugar to one cup of tea. (IC map with sugar and tea as the two
commodities)
b) Consumer B who is only interested in the total amount of money she had. IC map
with Re. 1 coin and Rs. 2 coins.
c) Good X is an inferior good.
d) A good that gives zero utility
e) Good X is apples and Good Y is noise
f) A good that gives negative utility after 5 units of consumption
9. A consumer spends his entire income on petrol and all other goods. The price of petrol is
initially Rs. 2 per litre. The government now announces a subsidy on petrol of Re. 1 per
litre, for each litre of petrol purchased in excess of 10 litres. No subsidy is paid on initial
10 litres of petrol. How would this affect the budget line of a consumer whose income is
Rs. 100 a month?
10. Decompose the change in consumption of good X, which is an inferior good, into income
and substitution effect, for increase in the price of good X.
11. A consumer consumes apples and chips. If his income increases from Rs. 10,000 to Rs.
12,000 per month, show the change in equilibrium when:
a) Both are normal goods
b) Apples are a normal good and chips are an inferior good.
12. Why the quantity demanded for a good may either increase or decrease with a decrease in
price. Explain using the concept of income and substitution effects.
13. Karan, a college student has Rs. 500 a week to spend. He spends it either on pizza at Rs.
50 per pizza or on movies at Rs. 100 per ticket. Draw Karan’s budget constraint. Find the
rate at which Pizza can be traded for a Movie ticket. Draw each new budget constraint he
would face if:
a) He gets scholarship of Rs. 100 per week
b) The price of pizza falls to Rs. 25
c) The price of movie ticket rises to Rs. 125
14. Derive the demand curve for Giffen good using indifference curve analysis. Also show
the income and substitution effect.
15. Show the effect of change in price of Good X on consumer’s equilibrium when the price
elasticity of demand for Good X is unitary elastic. Use indifference curve analysis.
16. Distinguish between Income consumption curve and Engel curve? When are they
backward bending?
17. Show the effect of a cash transfer and an equivalent in-kind transfer on consumer’s
welfare using indifference curve analysis. Which one would the consumer prefer and
why?
18. I spend my entire income on sugar and salt. My demand curve for salt is inelastic. If the
price of salt rises, will I increase or decrease the quantity demanded of sugar? Why?
19. An excellent harvest causes apples to fall in price by 10 percent. Consumers buy 5
percent more apples. The decrease has caused the consumers to spend more or less on
apples? Why?
20. Rama spends 30 percent of her income on clothing when she is earning Rs. 10000 per
month. With an increase in her earnings to Rs. 15000 per month. Her expense on clothing
becomes 25 percent of her income. Is clothing an inferior good for her or not? Why?
21. “Demand increases, causing the price to rise. Higher prices cause demand to fall.
Therefore, prices fall back to their original levels”. True or False. Explain you answer.
22. The market demand and supply curves of a commodity are given by Qd =90 – 6P and
Qs = - 20 + 4P respectively. Find the elasticity of demand and supply at the equilibrium.
23. If the price elasticity of demand is -2, it implies that consumers would buy twice as much
good if price falls by 10 percent. True or False. Why?
24. Define income elasticity of demand. What is its range?
25. Price elasticity of demand can be different at different points on the demand curve.
Explain.
26. Discuss the concepts of tradeoff and opportunity cost in context of the production
possibility frontier model.