Q1.

Assume that a consumer consumes two commodities X and Y and makes five
combinations for the two commodities:

Combination Units of X Units of Y

A 25 3
B 20 5
C 16 10
D 13 18
E 11 28

Calculate Marginal rate of Substitution and explain the answer.

ANSWER :

FORMULA

MRSyx = Δ y /Δ x

Where Δ x = Difference between the each x factors (change in X)

Δ y = Difference between the each y factors (change in Y)

FORMULA EXPLAINATION

Marginal rate of substitution refers to the rate at which one commodity can be substituted for
another commodity maintaining the same level of satisfaction. The MRS for the two substitute
goods X and Y may be defined as the quantity of commodity X required to replace one unit of
commodity Y such that the utility derived from either combination remains the same.MRS of X
and Y is denoted as Δ y /Δ x as it continues to diminish as the consumer continues to substitute X
for Y or vice versa. According to the ordinal utility approach, MRSyx decreases which means
that the quantity of a commodity an individual is willing to give up for an additional unit of the
other commodity continues to decrease with each substitution. MRSyx derived from different
combinations of commodities X and Y are given in table below.

Combination Change in X (Δ x) Change in Y (Δ y)

A - -
B -5 2
C -4 5
D -3 8
E -2 10
STEPS

Final explaination of answer is given below :

MRSyx = Δ y /Δ x

Δ y1/ Δ x1 = --

Δ y2/ Δ x2 = 2/(-5)

= -0.4

Δ y3/ Δ x3 = 5/(-4)

= -1.25

Δ y4/ Δ x4 = 8/(-3)

= -2.6

Δ y5/ Δ x5 = 10/(-2)

= -5

CORRECT ANSWER

SR.NO COMBINATION UNITS UNITS Change IN X CHANGE IN Y MRSyx =

OF X OF Y (Δ x) (Δ y) Δ y /Δ x

1 A 25 3 - - -
2 B 20 5 -5 2 -0.4
3 C 16 10 -4 5 -1.25
4 D 13 18 -3 8 -2.6
5 E 11 28 -2 10 -5
 Q2. Elaborate the term Total Revenue and Marginal revenue also calculate TR and MR in
the given table

SR.NO. Price Output (In Units )

1 20 1
2 18 2
3 16 3
4 14 4
5 12 5
ANSWER

FORMULA:

Total revenue : Price * Quantity (units)

Marginal Revenue = Change in Revenue / Change in Quantity

STEPS FOR COUNTING TOTAL REVENUE :

Total revenue = Price * Quantity (units) Change in revenue

1) TR1-0 = 20 - 0 = 20

P1*Q1 = 20*1 2) TR2-TR1 = 36 – 20 = 16

= 20
3) TR3 – TR2 = 48 – 36 = 12
P2*Q2 = 18*2
= 36 4) TR4 – TR3 = 56 – 48 = 08

P3*Q3 = 16*3 5) TR5 – TR4 = 60 – 56 = 04

= 48

P4*Q4 = 14*4
= 56

P5*Q5 = 12*5
= 60

Sr.No. Price Output (In Unit) Total revenue (TR) Change in revenue(CR) Change in unit (U)
1 20 1 20 20 1
2 18 2 36 16 1
3 16 3 48 12 1
4 14 4 56 08 1
5 12 5 60 04 1
STEPS FOR COUNTING MARGINAL REVENUE :

Marginal Revenue = Change in Revenue / Change in Quantity (Unit)

CR1/U1 = 20/01
= 20

CR2/U2 = 16/01
=16

CR3/U3 = 12/01
= 12

CR4/U4 = 08/01
= 08

CR5/U5 = 04/01

= 04

CORRECT ANSWER

Price Output (In Unit) Total revenue (TR) Marginal revenue

20 1 20 20
18 2 36 16
16 3 48 12
14 4 56 08
12 5 60 04
Q.3a) From the given Demand Schedule for air tickets, calculate elasticity of demand.

Price of Air Ticket (Per Ticket) Quantity Demanded (Tickets per month)
1,00,000 5,000
1,20,000 3,500

ANSWER

Difference in price = 1,20,000 – 1,00,000

= 20,000

Difference in quantity = 5,000 – 3500

= 1500

FORMULA :

Elasticity of Demand = Difference in price / Difference in quantity

= 20,000 / 1500

= 13.33

INTERPRETATION :

The elasticity of demand is positive that means if price of tickets will be increase the demand of
the tickets will be decrease.
3.b) Elaborate the term Elasticity of Supply and explain any three factors that determines
elasticity of supply.

ANSWER :

INTRODUCTION:

The elasticity of supply is a measure of change in the quantity supplied of a product in

response to a change in its price. An organisation needs to determine the impact of change in
price of a product on its supply in numerical terms. The concept of elasticity of supply helps
organisation to estimate the impact of change in the supply of a product with respect to its price.

CONCEPTS & APPLICATION :

The elasticity of supply cannot be same under all circumstances. This is because it is
influenced by a number of factors. Some important factors that determine elasticity of supply :

1) Nature of a product :
The product’s nature is an important factor that influences the elasticity of supply.
Products that are perishable in nature inelastic supply as their supply cannot be increased
or decreased in a short span of time. On the other hand, products, such as antiques and
old wines, which cannot be reproduced in the same form, have a constant supply.

2) Production techniques :
Production techniques used by organisation also have great influence on the supply
of their products. If organisations use the latest techniques of production, the supply can
be faster with respect to the change in the price of production.

3) Time period :
It affects the elasticity of supply to a great extent. For instance, in the resort run,
elasticity of supply is low due to various factors, such as obsolete production
techniques. Therefore changes in price do not affect the supply of products
immediately. If the price remains high for a longer period , the supply of products is
increased.
4) Agriculture products :

The production of agriculture products cannot be increased or decreased easily as

they depend on natural factors, including rain, humidity, and sunlight. This affects the
supply of such products to a great extent, thereby making the supply relatively
inelastic.
 The elasticity of supply is categorized into five types , namely perfectly elastic
supply, perfectly inelastic supply, relatively elastic supply, relatively inelastic supply,
and unitary elastic supply.

The elasticity of supply is measured using two methods namely proportionate method
and point method.

CONCLUSION :

Thus, the elasticity of supply is a measure of the degree of change in the quantity supplied of a
product in response to a change in its price.