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Chapter 4

The document discusses concepts related to economics including budget constraints, substitution and income effects, indifference curves, economies and diseconomies of scale, profit maximization, and returns to scale. It contains examples and questions related to these topics.

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Anna Moliaka
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15 views

Chapter 4

The document discusses concepts related to economics including budget constraints, substitution and income effects, indifference curves, economies and diseconomies of scale, profit maximization, and returns to scale. It contains examples and questions related to these topics.

Uploaded by

Anna Moliaka
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 4.

QUESTIONS:
PROBLEMS:
1. a)
The diagram represents the change in budget constraint of Jennifer when the price of coffee increases. She
will prefer less coffee, and the budget constraint will shift from AC to AB.
b)

When the substitution outweighs the income effect for croissants, the effect of consumption of croissants is
positive.
The substitution effect is ZX
The income effect is YX
The total price effect is YZ
c) When the income effect of the consumer is outweighed by the substitution effect of consumption of
croissants is negative.
The substitution effect is XY
The income effect is XZ
The total price effect is YZ

2. a) Coke and Pepsi are the substitutes.


b) Skis and ski bindings are compliments.
c) Indifference curves between coke and pepsi are straight, since they are nearly
perfect substitutes. The indifference curves are very bowed for skis and ski bindings,
since they are. compliments. A consumer will respond more to a change in the
relative price for Coke and Pepsi, possibly switching from one to another if the price
changes, because they are easily substitutable
3-6

Chapter 5
Questions
1-3 in a file
3. Economies of scale refer to these reduced costs per unit arising due to an increase in
the total output. Diseconomies of scale, on the other hand, occur when the output
increases to such a great extent that the cost per unit starts increasing.
5-6

7. maximum profit is the level of output where MC equals MR.


As long as the revenue of producing another unit of output (MR) is greater than the cost of
producing that unit of output (MC), the firm will increase its profit by using more variable
input to produce more output.
8. photo
9. Increasing Returns to Scale: When our inputs are increased by m, our output increases by
more than m.
Constant Returns to Scale: When our inputs are increased by m, our output increases by
exactly m.
Decreasing Returns to Scale: When our inputs are increased by m, our output increases by
less than m.
The multiplier must always be positive and greater than one because our goal is to look at
what happens when we increase production.
10. in the long run
Problems

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