IQRA UNIVERSITY IU

Business Economics
Practice assignment

Q1) A consumer spends all her income on food and clothing. At the current prices of price of
food = Rs. 10 and price of cloth = Rs. 5, she maximizes her utility by purchasing 20 units of food
and 50 units of clothing.(Hint: Take food on x-axis and cloth on y-axis)
i) What is the consumer’s income?
ii) What is the consumer ‘s marginal rate of substitution of food for clothing at the equilibrium

M= Pf X + PcY
M= 10 x 20 + 5 x 50
M= 200 +250
Income = 450 RS

For MRS:
For obtaining two extreme points for commodities X & Y
(Spend all money on commodity X)
M= Pf X + PcY
450= 10 x X + 0
X = 45 Units

(Spend all money on commodity Y)

M= Pf X + PcY
450= 0 + (5) Y
Y = 90 Units

Q2) Ali’s budget line relating good X and good Y has intercept of 50 unit of good X and 20
units of good Y. if the price of good X is 12, what is Ali’s income? What is the price of good Y?
What is then slope of budget line?
For Income:
When x- intercept put Y = 0

Income = Px X + PyY
I = (50)(12) + Py (0)
I = 600 RS
Price of good Y:
When x- intercept put X = 0

Income = Px X + PyY
600 = (12) (0) + Py (20)
600/20 = Py
Py = 30 RS
Slope of Budget line:
−Px
Slope =
Py
−12
Slope =
30
Slope = −0.4

Q3) Colgate sells its standard size toothpaste for Rs. 25. Its sales have been on an average 8000
units per month over the last year. Recently, its competitor Sparkle reduced the price of its same
standard size toothpaste from Rs. 35 to Rs. 30. As a result Colgate sales declined by 1500 units
per month.
i) Calculate the cross elasticity between the two products.
ii) What does your estimate indicate about the relationship between the two?

Solution:
Cross Elasticity Formula:

% Change∈the price of good Y

E xy =
% Change∈the demand for good X

Q4) ) You are given the following marginal utilities of goods X and Y obtained by a consumer.
Given that price of X = Rs. 2.5, price of Y = Rs. 1 and income = Rs. 11, find out the optimal
combination of goods
No. of Marginal utilities Marginal
unit of X utilities of
consumed Y
of a
commodit
y
1 15 10
2 12.5 9
3 10 8
4 7.5 7
5 5 6
6 2.5 5
7 0.5 4
Solution:

No. of Marginal utilities Marginal MUx /Px MUy/Py

unit of X utilities of
consumed Y
of a
commodit
y
1 15 10 6 10
2 12.5 9 5 9
3 10 8 4 8
4 7.5 7 3 7
5 5 6 2 6
6 2.5 5 1 5
7 0.5 4 0.2 4
Σ = 53 Σ = 49

Since Three ratios are equal so check one by one.

For Ratio = 6:

(i) MUx/Px = MUy/Py

6=6
(ii) Income = Px X + PyY
Income = (2.5) (1) + (1) (5)
Income = 7.5

For Ratio = 5:

(i) MUx/Px = MUy/Py

Ratio and Income Satisfied, so this
5=5
is the optimal combination
(ii) Income = Px X + PyY
Income = (2.5) (2) + (1) (6)
Income = 11

For Ratio = 4:

(i) MUx/Px = MUy/Py

4=4
(ii) Income = Px X + PyY
Income = (2.5) (3) + (1) (7)
Income = 14.5

Q5) Suppose the market demand for playing cards is given by the equation
 Q = 600 – 100P

Where Q is the no. of decks of cards demand each year and P is the price in Rupee. For a price
increase from Rs. 2 to Rs. 3 per deck, what is the price elasticity?
Solution:
Formula for Own price elasticity
Q 2−Q1
Q +Q

E
| |
d=
( 2 )
1 1

P2−P1

( P +2 P )
1 2

Given Equation:
Q = 600 – 100P
For Price 2 Rs

Q = 600 – 100(2)
Q = 400 RS

Given Equation:
Q = 600 – 100P
For Price 3 Rs

Q = 600 – 100(3)
Q = 300 RS

Put values in Formula:

300−400
300+ 400
(
|E d|= 3−2
2 )
3+ 2
( )
2
|E d|=0.714
In Percentage:
|E d|=71.4 %
Due to promotional deals offered by chhotochai, there's increase in demand of tea products in the
market of his tea product. As promotional deals give more benefits to customer and they want to
consume more for maximum profit.

Thus in short run, demand for the chhootochai product will rise shifting the demand curve to
right. Excess demand as compared to supply curve will rise the product and productivity/output
of tea products in the market.
In long run, barachai may also want to increase their production. As their is high demand for
promotional teas, also there is more profit due to increased price. Hence, he will also give
promotions to his tea product to remain in the competitive market. This will lead to increase in
supply of the tea products in the market and tea products attain a new equilibrium point by
increase in price and output. But continue supply may also increase the quantity of tea of money
and can reduce the price (law of supply) of tea products in some time by shifting supply curve to
right and attaining new equilibrium, where price will bring back to its original level with increase
in output of tea products.

Due to promotional deals offered by chhotochai, there's increase in demand of tea products in the
market of his tea product. As promotional deals give more benefits to customer and they want to
consume more for maximum profit.

Thus in short run, demand for the chhootochai product will rise shifting the demand curve to
right. Excess demand as compared to supply curve will rise the product and productivity/output
of tea products in the market.

In long run, barachai may also want to increase their production. As their is high demand for
promotional teas, also there is more profit due to increased price. Hence, he will also give
promotions to his tea product to remain in the competitive market. This will lead to increase in
supply of the tea products in the market and tea products attain a new equilibrium point by
increase in price and output. But continue supply may also increase the quantity of tea of money
and can reduce the price (law of supply) of tea products in some time by shifting supply curve to
right and attaining new equilibrium, where price will bring back to its original level with increase
in output of tea products.

Due to promotional deals offered by chhotochai, there's increase in demand of tea products in the
market of his tea product. As promotional deals give more benefits to customer and they want to
consume more for maximum profit.

Thus in short run, demand for the chhootochai product will rise shifting the demand curve to
right. Excess demand as compared to supply curve will rise the product and productivity/output
of tea products in the market.

In long run, barachai may also want to increase their production. As their is high demand for
promotional teas, also there is more profit due to increased price. Hence, he will also give
promotions to his tea product to remain in the competitive market. This will lead to increase in
supply of the tea products in the market and tea products attain a new equilibrium point by
increase in price and output. But continue supply may also increase the quantity of tea of money
and can reduce the price (law of supply) of tea products in some time by shifting supply curve to
right and attaining new equilibrium, where price will bring back to its original level with increase
in output of tea products.