ECONOMIC ASSIGNMENT

Economic Assignment

Economic Assignment

Part A

Marginal rate of substitution

The marginal rate of substitution (MRS), in economics, is the ratio of the variation d Y amount consumed of a good Y is necessary to maintain the utility of a consumer constant, while the amount of consumed a good X varies from - d X. The marginal rate of substitution is therefore a measure of how we replace, at the margin, a product by another, so that consumer satisfaction is the same. Graphically, it moves along an indifference curve. For example, for a given basket of goods, if the TMS between an apple and a pear is 2, a consumer will be indifferent between consuming a pear and eat two apples. The substitution rate itself varies with the basket.

For example, the TMS between apple and pear will vary depending on the quantities consumed already: eat a pear is more satisfying when you already consume ten apples and a pear, that when we eat three apples and fifteen pears.

Indifference curves are a set of combinations of goods that provide the same utility to the consumer. On an indifference curve the consumer is indifferent between any of the baskets of goods that are presented.

Indifference Map's example

Budget Constraints

The budget constraint is objective decision possible for a household in the. A bundle of goods (x 1, x 2) if and only allowed if the cost of the bundle of goods given the budget or income does not exceed y

p 1 x 1 + p 2 x 2 = y , p 1 x 1 + p 2 x 2 = y,

where the quantities of goods must also be non-negative

x 1 = 0 und x 2 = 0. x 1 = 0 and x 2 = 0

If the income is used for consumption in full, the savings s is zero, then, then reads the relevant area of the budget constraint

y = p 1 x 1 + p 2 x 2 . y = p 1 x 1 + p 2 x 2.

This economic or balance sheet equation is also known as consumption level. It is cargo space in a straight line

x 2 = x 2 =

y y

p 2 p 2

- -

p 1 p 1

p 2 p 2

x 1 x 1

Shown, which has a negative slope.

tanß = tanß =

d x 2 d x 2

d x 1 d x 1

= - = -

p 1 p 1

p 2 p 2

= - tana = - Tana

For n goods, the budget equation are shown

y = p T x = y = p T x =

n ? j =1 n S j = 1

p j x j p j x j

In relation to the goods space is the price vector p perpendicular to the budget line to the considered point x '.

Utility Maximization

The concept of utility maximization is the tendency to guide the decisions of Purchase of ...