Assignment (IT-408)

SUBMITTED BY:AMBREEN BIBI

BS-IT (SEMESTER 8)
Submitted to :Mam Zeenat
Q: As a matter of fact there is not much difference in conditions of consumer
equilibrium under utility and indifference curve approach .Explain
The concepts of consumer equilibrium under the utility approach and the
indifference curve approach are closely related, and indeed, there is not
much difference between them. Both approaches aim to explain how
consumers make choices to maximize their satisfaction or utility given their
budget constraints and the prices of goods and services. Let's break down
the similarities and minor differences between the two approaches:
Maximizing Utility vs. Indifference:
Utility Approach: In the utility approach, consumers are assumed to make
choices to maximize their total utility or satisfaction from consuming
various goods and services.
Indifference Curve Approach: In the indifference curve approach,
consumers are assumed to make choices that place them on an
indifference curve, where they are equally satisfied with the combinations
of goods and services.
Budget Constraint:
Utility Approach: Consumers consider their budget constraint, which is the
limitation imposed by their income and the prices of goods. They allocate
their income to maximize utility while staying within this constraint.
Indifference Curve Approach: Consumers also consider their budget
constraint in this approach. They select combinations of goods and services
that lie within their budget constraint but give them the highest possible
level of satisfaction.
Consumer Preferences:
Utility Approach: Consumer preferences are represented by a utility
function, which quantifies the satisfaction or utility derived from consuming
different combinations of goods.
Indifference Curve Approach: Consumer preferences are represented by
indifference curves, which show various combinations of goods that yield
the same level of satisfaction or utility.

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Equilibrium:
Utility Approach: Consumer equilibrium is achieved when the consumer
allocates their budget in a way that the marginal utility per dollar spent is
equal for all goods. This is expressed as MUx/Px = MUy/Py, where MU
represents marginal utility, and P represents the price of the respective
goods.
Indifference Curve Approach: Consumer equilibrium is reached when the
consumer chooses a combination of goods that maximizes their satisfaction
(utility) and lies on the highest possible indifference curve within their
budget constraint.
Preferences and Substitution:
Both approaches recognize that consumers are willing to substitute one
good for another when their prices change, reflecting the law of
diminishing marginal utility.
In summary, the key ideas and principles underlying consumer equilibrium
are very similar between the utility and indifference curve approaches. Both
approaches emphasize the role of consumer preferences, budget
constraints, and the concept of maximizing utility or satisfaction. The main
difference lies in the graphical representation of preferences (utility
function vs. indifference curves), but the ultimate goal of explaining
consumer behavior and choices remains consistent. Therefore, it can be
said that there is not much difference in conditions of consumer
equilibrium under these two approaches.
Q:show and explain the relationship between total ,average ,fixed and
marginal cost curves in short run time.

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In the short run, the relationships between total cost (TC), average cost (AC or
ATC), fixed cost (FC), and marginal cost (MC) curves play a crucial role in
understanding a firm's cost structure. Let's explore these relationships and their
graphical representation:
Total Cost (TC) Curve:
The TC curve shows the total cost incurred by a firm to produce a certain level of
output in the short run.
It is the sum of both fixed costs (FC) and variable costs (VC).
The TC curve generally increases as the level of output increases due to
diminishing marginal returns, which means that additional units of output
become progressively more expensive to produce.
Fixed Cost (FC) Curve:
The FC curve represents the fixed costs that do not change with the level of
production in the short run.
In graphical terms, it is a horizontal line because FC remains constant regardless
of the quantity produced.
Marginal Cost (MC) Curve:
The MC curve shows the additional cost incurred by a firm when producing one
more unit of output.
It is derived from changes in total cost due to changes in output.
The MC curve typically starts at its lowest point, intersects the average total cost
(ATC or AC) curve at its minimum point, and then rises as production increases.
This is due to the law of diminishing marginal returns.
Average Cost (AC or ATC) Curve:
The AC curve represents the average cost per unit of output.

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It is calculated by dividing the total cost (TC) by the quantity of output produced
(Q), so AC = TC/Q.
The AC curve initially decreases as output increases (due to spreading fixed costs
over more units), reaches a minimum point, and then starts increasing due to
diminishing marginal returns, intersecting the MC curve at its minimum point.
The relationships between these curves can be summarized as follows:
When MC is below AC, AC is decreasing. When MC is above AC, AC is increasing.
MC intersects the AC curve at its minimum point, which is also the point of
minimum ATC (average total cost).
When TC is increasing at an increasing rate (i.e., TC is becoming steeper), MC is
greater than AC.
When TC is increasing at a decreasing rate (i.e., TC is becoming less steep), MC is
less than AC.
In essence, the MC curve provides information about the rate of change in total
cost as output changes, the AC curve shows the average cost per unit of output,
and the FC curve represents fixed costs that remain constant. Understanding
these relationships is essential for firms to make production decisions in the short
run, such as determining the optimal level of output and pricing strategies based
on their cost structure.
Q: Show and explain the profit maximization output in short run of a firm which
is one of the several other firms producing and selling homogeneous product to
a large number of buyers.

In the short run, a firm operating in a perfectly competitive market aims to

maximize its profits by producing the quantity of output at which marginal cost

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(MC) equals marginal revenue (MR). Here's how profit maximization works for
such a firm:
Market Structure: The firm operates in a perfectly competitive market, which
means it is one of many firms producing and selling a homogeneous (identical)
product to a large number of buyers. In such a market, firms are price takers,
meaning they cannot influence the market price; they can only sell at the
prevailing market price.
Profit Maximization Rule: To maximize profit, a firm in the short run follows the
rule:
MC = MR
Marginal Cost (MC) is the additional cost incurred by producing one more unit of
output.
Marginal Revenue (MR) is the additional revenue earned by selling one more unit
of output.
Profit Calculation: Profit is calculated as follows:
Profit = Total Revenue (TR) - Total Cost (TC)
Total Revenue (TR) is the product of the market price (P) and the quantity of
output (Q) sold, i.e., TR = P * Q.
Total Cost (TC) includes both variable costs (VC) and fixed costs (FC).
Steps to Determine Profit-Maximizing Output:
a. Calculate MR: In a perfectly competitive market, MR is equal to the market
price (P). So, MR = P.
b. Determine MC: Calculate the MC for different levels of output.
c. Equate MC and MR: Find the level of output at which MC equals MR, i.e.,
MC=MR.
d. Profit-Maximizing Output: The quantity of output (Q) at which MC equals MR
represents the profit-maximizing level of production.
e. Calculate Profit: Calculate the profit at this level of output using the profit
formula mentioned above.
Profit Maximization Output Explanation:
If MC is less than MR (MC < MR) at the current level of production, the firm can
increase its profit by producing more units. It should keep producing until MC
equals MR.

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If MC is greater than MR (MC > MR) at the current level of production, the firm is
incurring higher costs than the revenue generated by producing additional units.
In this case, it should reduce its production to maximize profit.
When MC equals MR (MC = MR), the firm is producing the quantity of output at
which it maximizes its profit. At this point, the firm's profit is at its maximum.
In summary, a perfectly competitive firm maximizes its profit in the short run by
equating its marginal cost (MC) to its marginal revenue (MR). This occurs where
MC = MR. The corresponding level of output is the profit-maximizing output
quantity. In a perfectly competitive market, economic profit may be positive,
negative, or zero depending on the relationship between MC and MR at the
profit-maximizing quantity of output. If it's negative or zero, the firm may
continue to produce in the short run, but if it's positive, the firm will continue to
produce as long as profit remains positive.
Q -Write short note on the following:
1-Price Elasticity of demand and how its measure:
Price elasticity of demand (PED) is a concept in economics that measures the
responsiveness of the quantity demanded of a good or service to changes in its
price. In other words, it quantifies how much the quantity demanded changes in
percentage terms when the price of a product changes by a certain percentage.
Price elasticity of demand is a crucial concept for businesses, policymakers, and
economists, as it helps in understanding consumer behavior and predicting the
impact of price changes on total revenue.
The formula to calculate price elasticity of demand (PED) is as follows:
PED = (% Change in Quantity Demanded) / (% Change in Price)
Here's a more detailed explanation of how to measure price elasticity of demand:
1. Calculate the Initial and Final Values:
- First, you need to identify the initial (starting) price (P1) and the initial quantity
demanded (Q1).
- Then, determine the final (new) price (P2) and the final quantity demanded
(Q2) after the price change.
2. Calculate the Percentage Change in Price and Quantity Demanded:
- Calculate the percentage change in price as follows:
% Change in Price = ((P2 - P1) / P1) * 100
- Calculate the percentage change in quantity demanded as follows:
% Change in Quantity Demanded = ((Q2 - Q1) / Q1) * 100
3. Calculate the Price Elasticity of Demand:

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 - Finally, use the formula for PED to calculate the price elasticity of demand:
PED = (% Change in Quantity Demanded) / (% Change in Price)
Interpretation of Price Elasticity of Demand:
- If PED > 1 (in absolute value), it indicates elastic demand. This means that
consumers are relatively responsive to price changes, and a percentage change in
price leads to a proportionally larger percentage change in quantity demanded.
For example, if PED = 2, a 10% increase in price would lead to a 20% decrease in
quantity demanded.
- If PED < 1 (in absolute value), it indicates inelastic demand. In this case,
consumers are relatively unresponsive to price changes, and a percentage change
in price results in a proportionally smaller percentage change in quantity
demanded. For example, if PED = 0.5, a 10% increase in price would lead to only a
5% decrease in quantity demanded.
- If PED = 1 (in absolute value), it indicates unitary elastic demand. Here, the
percentage change in quantity demanded is exactly equal to the percentage
change in price. Total revenue remains constant as price changes.
- If PED = 0 (in absolute value), it indicates perfectly inelastic demand. Quantity
demanded does not respond to changes in price. This is a rare case where
consumers are not sensitive to price changes.
- If PED is undefined (infinite), it indicates perfectly elastic demand. In this case,
any increase in price would result in a quantity demanded of zero, and any
decrease in price would lead to an infinite quantity demanded.
2-Opportunity cost:
Opportunity cost is a fundamental concept in economics that refers to the value
of the next best alternative that must be forgone or sacrificed when a choice is
made. In other words, it represents the cost of choosing one option over another
and is related to the idea that resources are limited, and choices must be made to
allocate those resources efficiently.
Formula and Calculation of Opportunity Cost
Opportunity Cost=FO−COwhere:FO=Return on best forgone optionCO=Return on
chosen optionOpportunity Cost=FO−COwhere:FO=Return on best forgone
optionCO=Return on chosen option
The formula for calculating an opportunity cost is simply the difference between
the expected returns of each option.
Key points about opportunity cost:
Scarcity and Choices: Opportunity cost arises from the economic reality of
scarcity. Resources such as time, money, labor, and natural resources are finite,

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and individuals, businesses, and societies must make choices about how to
allocate these resources.
Trade-offs: When a choice is made, the opportunity cost is the value of the
benefits that could have been obtained from the next best alternative that was
not chosen. In essence, it's what you give up when you make a decision.
Subjective Nature: Opportunity cost is subjective and can vary from person to
person and situation to situation. What constitutes the next best alternative and
its value may differ for different individuals and circumstances.
Examples:
If a student decides to spend their evening studying for an exam rather than going
to a party, the opportunity cost is the enjoyment and social interaction they miss
out on at the party.
In business, if a company invests its capital in Project A instead of Project B, the
opportunity cost is the potential profit or benefits it could have gained from
Project B.
In macroeconomics, if a government allocates funds to one public program (e.g.,
healthcare) instead of another (e.g., education), the opportunity cost is the
potential benefits and improvements in education that were foregone.
Marginal Analysis: Opportunity cost is often considered when conducting
marginal analysis, which involves assessing the benefits and costs of incremental
changes in decision-making. Understanding the opportunity cost helps individuals
and organizations make more informed choices.
Sunk Costs vs. Opportunity Costs: It's important to distinguish between sunk costs
and opportunity costs. Sunk costs are expenditures that have already been
incurred and cannot be recovered, while opportunity costs relate to future
choices and involve the comparison of alternatives.
Implicit vs. Explicit Opportunity Costs: Opportunity costs can be explicit, involving
measurable monetary values, or implicit, involving non-monetary factors such as
time or personal satisfaction.
Decision-Making Tool: Economists and decision-makers often use the concept of
opportunity cost to evaluate trade-offs, make rational choices, and allocate
resources efficiently.
In summary, opportunity cost is a fundamental economic concept that reflects
the value of the foregone alternatives when making choices. It plays a crucial role

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in decision-making, resource allocation, and understanding the trade-offs
inherent in economic and individual choices
3- Inflation and its kinds:
Inflation is an economic concept that refers to the sustained increase in the
general price level of goods and services in an economy over a period of time.
Inflation leads to a decrease in the purchasing power of a currency, meaning that
the same amount of money can buy fewer goods and services than it could in the
past. Inflation is typically expressed as an annual percentage increase in prices.
There are several types or classifications of inflation in economics, based on
various factors and causes. Here are some common types of inflation:
Demand-Pull Inflation:
Demand-pull inflation occurs when the aggregate demand for goods and services
in an economy exceeds aggregate supply.
It is often caused by factors such as increased consumer spending, increased
business investment, government spending, or strong exports.
Demand-pull inflation is often associated with a booming economy and is
considered a sign of economic growth.
Cost-Push Inflation:
Cost-push inflation occurs when the cost of production for goods and services
increases, leading producers to raise their prices to maintain profit margins.
Common factors causing cost-push inflation include rising wages, increases in the
prices of raw materials, energy price spikes, and supply disruptions.
This type of inflation can be particularly challenging for central banks to manage
because it is driven by supply-side factors.
Built-In Inflation (Wage-Price Spiral):
Built-in inflation is a self-perpetuating cycle in which workers demand higher
wages to keep up with rising prices, and businesses, in turn, raise prices to cover
increased labor costs.
It can become ingrained in the economy's structure, making it difficult to control.
Built-in inflation is often associated with long periods of inflationary pressure.
Monetary Inflation (Monetary Expansion):
Monetary inflation occurs when the money supply in an economy increases at a
faster rate than the growth of goods and services.
It can be caused by factors like central banks printing more money, reducing
interest rates, or engaging in quantitative easing.
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Hyperinflation is an extreme form of monetary inflation, characterized by very
high and rapidly increasing price levels.
Hyperinflation:
Hyperinflation is an extremely high and typically uncontrollable inflation rate that
results in the rapid and exponential increase in prices.
It can lead to the near worthlessness of a country's currency and severe economic
disruption.
Hyperinflation is often caused by a combination of factors, including excessive
money printing, loss of confidence in the currency, and economic instability.
Core Inflation:
Core inflation excludes volatile factors like food and energy prices, which can
fluctuate significantly in the short term.
It provides a measure of underlying inflation trends and is often used by central
banks to make monetary policy decisions.
4- Causes on unemployment:
Economic Recession or Downturn:
One of the primary causes of unemployment is an economic recession or
downturn. During these periods, businesses may experience reduced demand for
their products or services, leading to layoffs or hiring freezes.
Technological Advancements:
Rapid technological advancements can lead to job displacement and
unemployment in certain industries as automation and efficiency improvements
reduce the need for human labor.
Globalization and Offshoring:
The globalization of markets can result in companies moving production or
services to countries with lower labor costs, which can lead to job losses in high-
cost regions.
Structural Changes in Industries:
Changes in the structure of industries, such as the decline of traditional
manufacturing sectors or the rise of new industries, can cause structural
unemployment as workers with obsolete skills struggle to find suitable
employment.
Mismatch of Skills and Job Requirements:

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A mismatch between the skills possessed by job seekers and the skills required by
employers can result in unemployment. This can occur due to rapid changes in job
requirements or inadequate education and training.
Minimum Wage and Labor Regulations:
Labor market regulations, such as minimum wage laws, can impact the demand
for labor and potentially lead to unemployment if employers cannot afford to hire
workers at the mandated wage rate.
Discrimination and Barriers to Employment:
Discrimination based on factors such as race, gender, age, or disability can limit
individuals' access to job opportunities and result in higher unemployment rates
for affected groups.
Geographic Mobility:
Workers who are unable or unwilling to relocate for job opportunities may
experience unemployment if suitable jobs are not available in their current
location.
Financial Crises and Banking Failures:
Financial crises and banking failures can disrupt economic activity and lead to a
contraction in lending, making it difficult for businesses to access capital for
expansion and job creation.
Educational and Training Gaps:
Insufficient access to education and training programs that align with labor
market demands can result in skills gaps and hinder individuals' ability to find
employment.

5- How MPC and MPS must equal to 1:

MPC (Marginal Propensity to Consume) and MPS (Marginal Propensity to Save)
must sum up to 1 in economics due to the basic principles of income accounting
and the way income is allocated within an economy. Here's a more detailed
explanation of why MPC + MPS equals 1:
Income Accounting Identity:
In economics, the total income (Y) generated within an economy must be
allocated to either consumption (C) or saving (S).
Therefore, by definition, total income (Y) is equal to the total amount spent on
consumption (C) plus the total amount saved (S): Y = C + S

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MPC and MPS Definitions:
MPC represents the fraction of an additional unit of income that is spent on
consumption, which can be expressed as ΔC / ΔY.
MPS represents the fraction of an additional unit of income that is saved, which
can be expressed as ΔS / ΔY.
Relationship between MPC and MPS:
Since all income (Y) is either spent on consumption (C) or saved (S), the
relationship between MPC and MPS can be expressed as follows: ΔC + ΔS = ΔY
Sum of MPC and MPS:
Rearranging the equation above, you get: ΔC = ΔY - ΔS
Now, substitute the expressions for MPC and MPS: MPC * ΔY = ΔY - MPS * ΔY
Divide both sides by ΔY: MPC = 1 - MPS
This equation shows that MPC and MPS are complements, meaning that they are
two sides of the same coin. If you spend more of your income (higher MPC), you
save less (lower MPS), and vice versa.
MPC + MPS = 1:
Finally, by rearranging the equation above, you get: MPC + MPS = 1
This equation illustrates the fundamental relationship between MPC and MPS.
The fraction of additional income that is spent on consumption (MPC) plus the
fraction that is saved (MPS) equals 1 because all income must be allocated to
either consumption or saving.
In summary, the relationship between MPC and MPS is a reflection of how
individuals and households allocate their income. All income earned within an
economy is either spent on consumption or saved, and this principle is captured
by the equation MPC + MPS = 1. If you spend more, you save less, and if you save
more, you spend less, ensuring that the two propensities always sum to 1.
Q : What is equilibrium level of income?
Determination of Equilibrium Level
The Keynesian Theory states that the equilibrium situation is usually expressed
in terms of Aggregate Demand (AD) and Aggregate Supply (AS). When aggregate
demand for products and services over a given period of time equals aggregate
supply, an economy is in equilibrium.
So, equilibrium is attained when:
AD = AS
Now, we know that,

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 AD = C + I,
and AS = C + S
Therefore,
C+S=C+I
i.e., S = I
Therefore, according to Keynes, the two approaches to determine the
equilibrium level of income and employment of an economy are Aggregate
Demand-Aggregate Supply Approach (AD-AS Approach) and Saving-Investment
Approach (S-I Approach).
However, to determine the equilibrium output, there are certain assumptions
that needs to be kept in mind.

Assumptions
1. The determination of the equilibrium level will be examined using a two-
sector model (households and firms). Simply put, it is assumed that there is
no foreign industry or government in the economy.
2. It is also assumed that investment expenditure is autonomous, i.e., that
income level does not have any impact on investments.
3. It is assumed that the pricing level is constant.
4. Also, to determine equilibrium output, short-run will be considered.
1. Aggregate Demand-Aggregate Supply Approach (AD-AS Approach)
The Keynesian theory states that when aggregate demand as shown by the C+I
curve is equal to the total output (Aggregate Supply or AS), the equilibrium level
of income in an economy is established.
There are two parts to the aggregate demand:
 Consumption Expenditure (C): This expenditure changes directly with
income; i.e., consumption rises as income rises.
 Investment Expenditure (I): This expenditure is considered to be
autonomous and independent of one’s income level.
So, in the income determination analysis, the AD curve is represented by the C+I
curve.
The overall output of goods and services from the national income is known as
the aggregate supply. A 45° line is used to represent it. The AS curve is
represented by the (C+S) curve because the money received is either spent or
saved.
Example:

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The AD or (C+ I) curve in the above graph shows the desired expenditure level by
consumers and businesses at each level of income. At point E where the (C+ I)
curve intersects the 45° line, the economy is in equilibrium.
Observations:
 The equilibrium point, denoted by the letter E, occurs when desired
expenditure on consumption and investment is equal to the total output.
 OY is the output at the equilibrium level that corresponds to point E.
 In the above table, the Aggregate Demand is equal to the Aggregate Supply;
i.e., ₹200 Crores, when the equilibrium level of income is ₹200 Crores.
 It is a case of Effective Demand. Effective demand refers to that level of AD
that becomes ‘effective’ since it is equal to AS.

2. Saving-Investment Approach (S-I Approach)
The Saving-Investment Approach states that when the planned saving (S) is
equal to the planned investment (I), the equilibrium level of income in an
economy is established.
Example

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 .com
The Investment curve in the above graph shows the autonomous investment
made; therefore, it is parallel to the X-axis. The Saving Curve S slopes upward,
which means that saving increases with an increase in income. At point E where
the investment curve intersects the saving curve, the economy is in equilibrium.
Observations:
 The equilibrium point, denoted by the letter E, occurs where saving and
investment curves intersect each other.
 Also, at point E, ex-ante saving is equal to ex-ante investment.
 The equilibrium level of output corresponding to the equilibrium point E is
OY.
 In the above table, planned saving is equal to planned investment; i.e., ₹30
Crores, when the equilibrium level of income is ₹200 Crores.

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Q- What is aggregate production function?
Ans: The aggregate production function is the maximum output that can be
produced given the quantities of the factors of production.
The components of aggregate production function are land, labor, capital, and
entrepreneurship.

These are all considered necessary as they impact the production process.
Therefore, if distortion happens in even a single factor, it will affect the
economy’s efficiency.
What does the aggregate production function show?
The aggregate production function shows the relationship between input and
output. It looks into the economy’s production efficiency due to production and
its productivity standards. As a result, economists can estimate the predictions of
the level of economic activity and its potential in the future.
What shifts the aggregate production function?
The changes in the factors of production can have a significant impact on the
production capability. It can induce a shift in production function in the economy.
For example, the output out of capital stock at given levels can vary (increase)
with new technological developments.
Q -Discuss in detail two methods in market sharing cartel ?
Market-sharing cartels are illegal agreements between firms in which they divide
a market among themselves, typically by allocating customers, territories, or
products. These cartels aim to reduce competition, increase prices, and allow
participating firms to enjoy higher profits. I must emphasize that engaging in
market-sharing cartels is illegal in most countries and violates antitrust laws.
However, for educational purposes, I can explain two methods that have been
used in market-sharing cartels:
1.Customer Allocation:
In this method, cartel members agree to divide the customers or consumers in
the market among themselves. Each firm is assigned specific customers or
customer groups, and they refrain from competing for each other's allocated

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 customers. This leads to the creation of de facto monopolies or duopolies
within the cartel. Here's how customer allocation works:
- Identification of Customers: The cartel members first identify the various
customers or consumer groups within the market. This could include businesses,
government agencies, or individual consumers.
- Assignment of Customers: The cartel members then assign specific customers
or territories to each firm within the cartel. For example, one firm might be
assigned all customers in a particular geographic region, while another firm could
be assigned customers in a different region.
- Non-Compete Agreement: Once customers are allocated, the firms agree not
to compete with each other for the assigned customers. They refrain from
marketing to or selling their products to customers allocated to other cartel
members.
- Stability of Prices: Customer allocation tends to lead to stable prices within
each allocated territory or customer group since there is little or no competition.
This can result in higher prices for consumers and increased profits for cartel
members.
2. Territorial Division:
In this method, cartel members divide the market geographically, with each firm
given exclusive rights to operate or sell its products in specific geographic areas.
Territorial division can be particularly effective in industries where location
matters, such as distribution or retail. Here's how territorial division works:
- Geographic Zones: The cartel members establish geographic zones or
territories within the market. Each firm is granted exclusive rights to operate
within its designated territory.
- Non-Compete Agreement: Similar to customer allocation, the firms agree not
to compete with each other in their respective territories. They avoid entering
each other's designated areas and selling to customers within those areas.
- Market Control: Territorial division can result in each firm having a monopoly
or a dominant position within its assigned territory. This allows them to control
prices and limit competition effectively.
- Cooperation: Cartel members may also cooperate on issues such as pricing
policies, production levels, and distribution within their designated territories to
maintain stability and maximize profits.
It's important to reiterate that market-sharing cartels are illegal and subject to
severe penalties in many countries because they undermine competition, harm
consumers, and violate antitrust laws. Authorities actively investigate and

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prosecute such cartel activities to maintain fair and competitive markets.
Businesses are encouraged to comply with competition laws and regulations to
avoid legal consequences and promote healthy market competition.
Question #09:
Answer:
Step 1: Jason's budget constraint
Jason's budget equation is:
4M + 2P = 200
The budget constraint is shown in the figure below:

The intercept of x-axis is 200/2=100, and the intercept of y-axis is 200/4=50.

Step 2: Various combinations of meat and potatoes
Given that the meat and potatoes are perfect substitutes, the price line or budget
line corresponds to the indifference curve when goods are perfect substitutes
(complete substitution allows zero consumption of one good).
For the utility function:
U(M, P) = 2M + P
the budget equation is 4M + 2P = 200
Subject to the budget constraint, the combination of meat and potatoes are:
(4 x 50) + 0 = 200
(4 x 30) + (2 x 40) = 200
(4 x 10) + (2 x 80) = 200
(4 x 0) + (2 x 100) = 200
Thus, Jason can choose any combination between (50,0) to (0,100) on the price
line, which will maximize her utility.
Step 3: Budget line after supermarket's special promotions
Jason's budget equation is:
4M + 2P = 200

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For P = 20
4M + 2(20) = 200
4M + 40 = 200
4M = 200 - 40
M = 40
Jason gets extra 10 potatoes on a purchase of 20 pounds at $2 per pound. Json's
actual consumption bundle becomes (30,40) due to the supermarket's special
promotion.
The new budget line will be:

Step 4: Budget line after supermarket's special promotion ends

Jason's budget equation when the price of potato is $4:
4M + 4P = 200
Since, supermarket ends promotion, at P=20, the amount of meat purchased will
be:
4M + 4(20) = 200
4M + 80 = 200
4M = 200 - 80
M = 30
The budget line will be:

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Hence, Jason will maximize her utility when her consumption bundle for meat and
potatoes are (30,20).

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