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Assignment 1 [Theory of Consumer Behaviour]

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Assignment 1 [Theory of Consumer Behaviour]

Uploaded by

p24anshumans
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© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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PGP 2019

Assignment 1: Theory of Consumer Behaviour

August 1, 2019

Please write all the steps neatly in your submission and draw well labelled graphs. Sub-
missions after the deadline will not be graded.

Consumer preference and choice


1. The following combinations of goods X and Y represent various market baskets. Con-
sumption is measured in kgs per month.
Market Basket Units of X Units of Y
A 4 6
B 16 7
C 15 3
D 3 2

Explain which market basket(s) is(are) preferred to other(s), and if there is any uncer-
tainty over which is preferable, point this out as well.

√
2. Suppose River Song's utility function U(x,y) is xy .

(a) What are the marginal utilities of x and y ?

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(b) Does she believe more is better for each good?

(c) Do her preferences exhibit a diminishing marginal utility of x? Is the marginal


utility of y diminishing?

(d) Suppose the price of good x is Rs. 2 and price of good y is Re. 1, and her income
is Rs. 10. What is her optimal basket of goods x and y ?

Demand and Supply


3. The inverse demand curve for product X is given by:

PX = 25 − 0.005Q + 0.15PY (1)

, where PX represents price in rupees per unit, Q represents sales in kgs per week, and
PY represents selling price of another product Y in rupees per unit. The inverse supply

curve of product X is given by:

PX = 5 + 0.004Q (2)

(a) Determine the equilibrium price and sales of X . Let PY = 10.

(b) Determine whether X and Y are substitutes or complements.

4. The demand for tickets to a T-20 cricket match in Holkar Stadium at Indore is given by
the equation QD = 3, 50, 000 − 800P . The supply of tickets to the match is given by the
capacity of the stadium, which is 1,50,000.

(a) What is the equilibrium price of tickets to the match?

(b) What is the price elasticity of demand at the equilibrium price?

(c) What is the price elasticity of supply at the equilibrium price?

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Bonus question
5. Some texts dene a `luxury good' as a good for which the income elasticity of demand is
greater than 1. Suppose that a consumer purchases only two goods. Can both goods be
luxury goods? Explain.

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