Q.1. As a consumer: a.

List down the goods/ services along with their price (an estimate if
actual is not available) that form your consumption basket. (You have to list at least 15 items
– 10 goods and 5 services; these should be used by you on a regular basis).

Goods & services along with their price that form my consumption basket.

Goods Price Services Price

Shower Gel Rs 750 Milk services Rs 99 per day

Tracksuit (Gym Wear) Rs 3000 Vegetables Delivery Rs 250 per Week

Antiseptic Mouthwash Rs 65 Internet Service Rs 1500 (75 mbps)

Mouthwash Rs 230 Electricity ~ Rs 4000

Toothbrush (Glister) Rs 75 Laundry Rs 1500

Toothpaste (Glister) Rs 200

Pen (Trimax) Rs 35 per pen

Facewash (Beardo) Rs 150

Hair Wax (Beardo) Rs 200

b. Group the list into substitute good and complimentary goods giving reasons for your
grouping. Also, draw the diagram of an Indifference Curve for perfect substitutes and perfect
compliments, giving reasons for the shape of the Indifference Curve.

Goods Price Good Type Reason

Shower Gel Rs 750 Substitute as a soap can be
used in its place

Tracksuit (Gym Wear) Rs 3000 Complimentary as these suit

require shoes

Antiseptic Mouthwash Rs 65 Substitute as mouth freshner

could be used too

Mouthwash Rs 230 Substitute can be substituted

 with toothpaste

Toothbrush (Glister) Rs 75 Complimentary as it requires

toothpaste

Toothpaste (Glister) Rs 200 Complimentary as it requires

toothbrush

Pen (Trimax) Rs 35 Substitute as pencils can be

used in its place

Facewash (Beardo) Rs 150 Substitute a soap can be used in

its place

Hair Wax (Beardo) Rs 200 Substitute as hair gel can be

used too
Services Price Services Type Reason
Milk services Rs 99 per day Substitute milk could be
collected too

Vegetables Delivery Rs 250 Substitute vegetables could be

bought at shops

Internet Service Rs 1500 Complimentary as electronic gadgets

are needed

Electricity ~ Rs 4000 Complimentary as electronic gadgets

are needed

Laundry Rs 1500 Substitute can be done at home

Indifference Curve for perfect substitutes Indifference curves for perfect compliments
Q.2. From the list that you had made in Q1: a. Choose two products/ services that are the
most important to you, and list down the same with a brief justification for your choice.

Tracksuit (Gym Wear) for workout & Shower Gel are one of the most important to me as I am
more into Health & Fitness. I would be able to manage without any other goods.

b. Further, draw the indifference curve for the two products/ services, if you like both of
them to the same extent.

The goods being perfectly supplementary, the indifference curve is

Tracksuit on x axis & Shower Gel on Y axis

c. In addition based on your income (an estimate, could be pocket money, etc.) draw the
budget line for yourself (based on prices in Q1 and income in Q2, for the 2 goods you have
chosen)?

The prices for the goods Rs 3000 & Rs 750.

Monthly, I receive Rs 25,000 as my pocket money. Thus we have -

d. Draw the consumer equilibrium based on the calculation in b & c and justify your answer.

Point A or Point B can be equilibrium points as at these

points the Indifference curve & the budget line touch
A

Q.3. For the two products/ services chosen in Q2: a. Explain the factor affecting the demand
for the two products chosen in Q2 (please note I do not want general factors affecting
demand for a products).

The factors affecting demand can be increase or decrease in the price for tracksuit, depends
upon the mindset of the consumer. For example, every new year, the demand for workout
wear & equipments increase as people set the “new year resolutions”. However, the factors
affecting the demand for shower gel might be related to the price in its substitute, quality
fluctuations, etc.

b. Further, draw the demand schedule and the demand curve for both the products (ask
yourself how your demand for the product would change if the price (i) went up by 25%, (ii)
went down by 25%, (iii) went up by 50% and (iv) went down by 50%. c. Based on your
calculation of price elasticity, what can you say about nature of the two commodities?

Q. 5. Assume yourself to be a producer operating in a perfectly competitive market. What can

you expect? a. The characteristics of the market to be?

Large number of buyers & sellers – The share of each seller is insignificant. Thus the seller has
to take whatever price is offered by the market and is a price taker

Homogenous product – The product sold is identical in all respects such as its size, nature ,
shape and color.

Perfect knowledge – Each firm has uniform access to resources and as a result all the firms have
a similar cost structure.

b. About your equilibrium and profits in the short run?

In the short run , the firms cannot leave the industry or enter the industry.
average costs are lower than the average revenue. To calculate the cost, see where the
quantity hits the average cost line, and then draw a horizontal line to the Y axis. Whatever area
is above the cost is the profit or the loss.

Equlibrium is established when Marginal cost = Marginal Revenue and MC > MR (MC cuts the
MR curve from below)

Source: Intelligent Economist

c. About your equilibrium and profits in the long run?

The long run is a period of time where all the factors of production can be altered. In addition,
even new firms can enter the the industry and compete with the existing firm
Source: Intelligent Economist

In the long run, with the entry of new firms in the industry, the price of the product will go
down as a result of the increase in supply of output and also the cost will go up as a result of
more intensive competition for factors of production. The firms will continue entering the
industry until the price is equal to average cost so that all firms are earning only normal profits.

In the Perfect Competition Long Run, the loss-making firms will exit the industry, and new firms
will enter the market.

Equlibrium is established when Marginal cost = Marginal Revenue and MC > MR (MC cuts the
MR curve from below)