MICRO ECONOMICS ASSIGNMENT

Mathematical-Micro Economics Assignment

Mathematical-Micro Economics Assignment

Answer 1)

Part a)

The demand curve for good X is as follows:

Quantity Consumed

Price of Good X

200

4

180

6

160

8

140

10

120

12

100

14

80

16

In the above figure, the graph shows the demand curve of good X. Keeping in mind the provided data, the quantity consumed of good X is indirectly proportion to the price of Good X. When the price of good X increases the quantity demanded for X declines as the customer has more options with the limited amount of money.

If the price of food declines to $1, the consumer will start consuming more which means the quantity consume of food will increase. Previously, the price of food was $2 and the customer was buying 200 quantities which mean he is spending $400 in food. If the price decline to $1, the consumer has the option of consuming 400 quantities of food. Joan will be consuming the good X at the same capacity as its price has not changed. Joan will be choosing the bundle of (400,200) in the situation where the price of food falls to $1.

Part b)

The income effect on the demand curve is directly proportional. If the person's income decreases, the purchasing power of the individual will also decreases which will also decrease the consumption of goods. On the other hand, if the income of the individual increases it will have an opposite effect which mean that the consumer will be consuming more goods as his or her purchasing power will be increased.

Part c)

On the other hand, the substitution effect is related to alternative products available to the consumer. The substitution effect states that if the substitute product becomes cheap, the consumer is willing to change its consumption from the original product (Stigler, 1987: 531). The Substitution Effect is the effect due only to the relative price change, controlling for the change in real income. In order to compute it we ask what is the bundle that would make the consumer just as happy as before the price change, but if they had to make their choice faced with the new prices. To find this point we consider a budget line characterized by the new prices but with a level of income such that it is tangent to the initial indifference curve.

Part d)

Food is not a Giffen good. This is because Giffen good is a consumer good for which demand rises when the price increases, and demand falls when the price decreases. This phenomenon is notable because it violates the law of demand, whereby demand should increase as price falls and decrease as price rises. To be a Giffen good, the item must lack easy substitutes and it must be an inferior good, or a good for which demand declines as the level of income in the economy increases. Economists disagree on whether Giffen goods exist and how common they are.

Part e)

U = XY2

1 = Y2/2XY = Y/X i.e. Y = 2X

For the bundle (200, 200)

U = (200) (200)2

8,000,000 = XY2

8,000,000 = X (2X2)

X = ...