Business Economic

Question no 1. What is indifference curve, explain with the help of diagram and
explain its Properties.

Answer -1
Introduction -

An indifferent curve is graph in which an alternative combination of consumption of two goods present same
level of satisfaction.

An indifferent curve the consumer is indifferent to the combination of goods whatever consumer is buying but
the level of satisfaction is same. This curve is also called the ISO utility curve or equal utility curve.

An indifferent curve only two commodity is taken into As a consumer consume two commodity green tea
masala tea and now end of the day consumer have only two commodity to use.as the consumer will consume
of green tea and masala tea in other to get same level of satisfaction so either to the consumer will consume
ten cup of green tea and the five cup of masala tea vice versa ten cup of masala tea and the 5 cup to green tea.
In other way consumer must either increase consumption of one commodity or decrease other commodity
other commodity vice versa decrease consumption of one commodity and increase other. In similar way
different combination of green tea and the masala tea in such a way consumer is getting same level of utility
end of the day consumer is indifferent to the different type of combination of green tea and masala tea.

Table of indifferent schedule

Combination Green Tea Masala Tea Total utility

A 15
B 12
C 9
D 7
E 4
F 2
1 U
3 U
5 U
7 U
9 U
12 U

Assume Prashant has 15 unit of Green tea and 1 unit of Masala tea. Prashant have only two commodities to
use. now we ask Prashant to how many units of Masala tea he will sacrifice in exchange for an additional unit
of Green tea. With this exchange the prashant level of satisfaction remains unchange. Now prashant is
agreeing to sacrifice 3 unit of Masala tea for the Additional unit of green tea therefor we have two
combination green tea and Masala Tea giving same satisfaction to Prashant.
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15

12

9
Green Tea

IC

M
1 3 5 7 9 12

Masala Tea

Properties of indifference curve

Indifference curve is convex to the origin

Indifference curve slopes down wards from left to right indifference curve is convex to origin because
increasing one commodity and decreasing other commodity but the utility remain same due to marginal rates
of substitution. We know that marginal utility of consuming good decrease due to supply increase so that
consumer is sacrificing more of the goods to get another good.so that indifference curve slopes downward.
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15

12

9
Green Tea

IC

M
1 3 5 7 9 12

Masala Tea

higher indifference curve shows higher level of satisfaction

higher indifference curve indicates higher consumer satisfaction. on other ways higher indifferent curve show
more satisfaction than the combination of the lower indifference curve consumer is always want higher
indifferent Curve. consumer is always preferring for higher quantity and satisfaction. Let’s Look with the help
of the graph below.

A
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14 B
L2
10 A

L1

B
10 14

Two indifference curves do not interest each order

Each indifference curve shows different level of satisfaction, so it is not possible that two curves with different
with different satisfaction level cross each other it minces both curves contain the same level of satisfaction at
that point which is not possible.

A Good A

16
C
13
B

10
A l2

l1

10 14 18 B
Indifference curve Slops Downward to the right.
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Indifference curve have negative slope due to when the unit of one goods will increase the units of other
goods will decrease but the level of satisfaction will remain same. this is reflected graphically in the indifferent
curve.

15

12

9
Green Tea

IC

M
1 3 5 7 9 12

Masala Tea
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Question 2 Consider the demand for good. At price rs 4 the demand for the good is 25 units. Suppose price of
the goods increase to rs 5. And as result, the demand for the good falls to 20 units. Calculate the price
elasticity?

Answer

Introduction

Price elasticity of demand

Price elasticity of demand occur where any change in the price of goods either the price of the goods will
increase or decrease Suppose I said price of the good increase by some percent that’s means demand is
decrease by some percent so the percentage change in the demand due to change in the price is called as
price elasticity with the help of the example if the mango price is rise than the quantity demand of the mango
goes down Price elasticity of demand is also know as PED

Demand
usually
When
drops
Prices
PRICE
rise

When
Prices Demand
DEMAND drop usually
rises

Its shows how demand responds to a change in the price of product and how price response to the change in
the demand of the product.

Different type of price elasticity

There are five type of price elasticity We can classify the five type of elasticity of demand

Perfectly elastic demand

Whenever if any rise and fall because of change in the price of the commodity known as perfectly elastic
demand.

Perfectly inelastic demand

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Perfectly inelastic demand when there is no change measured against a price change in this case elasticity of
demand is zero

Relatively Elastic demand

If the price of the goods increases by fifty percent than demand for the product will necessarily fall by more
than fifty percent.

Relatively inelastic demand

Relatively inelastic demand refers to the percentage change in the demand for the good is less than the
percentage change in the price.

Unitary elastic demand

Unitary elastic demand refers to when the percentage change in demand for the goods and services is equal to
the percentage change in the price of the goods and services.

Percentage change in quantity demand

Price elasticity of demand =
Percentage change in price

Find the below formula for calculating the price elasticity of demand

Change in quantity price

EP =
Change in price Quantity

EP = price elasticity of demand

Old price = 4
New price = 5
Change in price = 5 - 4 = 1
Old demand = 25
New demand = 20
Change in demand 20-25 = -5

5 4 4
EP = = = 0.8
1 25 5
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3a. two goods have

Answer

Introduction

Cross price Elasticity:

I it is measure the sensitivity of the quantity demand of the a goods automatically give a change in the price of
other goods cross elasticity the demand will effected due to the change in the price of the related goods In
the market there are some goods which is related to one another example car and petrol ets
If the car price will increase or decrease can positively and negatively affect the petrol price

The cross elasticity of demand can be measured as:

Percentage change in quantity demand Price Y

Ec =
Percentage Change in price Quantity X

QX PY
Ec =
PY QX

Ec = cross elasticity of demand

Qx = Original quantity demand
Q x = Change in quantity demand
Py =Original price of goods
Py = change in the price

Three type of cross elasticity of demand

Positive cross elasticity of demand

When the price will increase in relate goods and services than the demand will increase for the main goods
and services. This is often because consumer always try to maximize utility. similarly, when the competing
product price is reduced than increase in demand of the substitute Product cross elasticity of demand is
positive in the case of substitute goods. For example, if the demand for coke has increase from 50 rs to 60rs
then the increase the price of the Pepsi from 40rs to 45.

Where

Py = 40

QY = 50

Qx=Qx1-Qx = 60 -50 = 10 units

Py=Py1 - PY = 45 -40 = 5 units

Ec = 60/5 *40/50 = 1
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Negative cross elasticity of demand

When the price will increase in the related product the demand will decrease for the main product.in
complementary goods cross elasticity of the goods is negative. For example, if the demand for Movie has
increase from 200rs to 250rs then the decrease the price of the popcorn from 100rs to 80rs.

Zero cross elasticity of demand

When the price will increase in the related product the demand will remain same for the main product.in
independent goods cross elasticity of the goods is Zero. For example, if the demand for Fan has increase from
200rs to 250rs then the decrease the price of the bread will remain same.
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Question no 3.b Calculate Marginal Utility and Average utility from the information given in the below table.

Quantity consumed Total Utility

1 20
2 35
3 47
4 55
5 60

Answer:
MARGINAL UTILITY

Introduction:
Marginal utility is additional satisfaction that the consumer consuming additional unit of goods and services.
Consuming units may be positive, negative, or zero marginal utility. The concept implies that the how much of
the goods and services consumer willing to purchase.

Marginal utility may be Positive, negative or zero

Positive marginal utility.

Positive marginal utility refers to when the consumer consumes of an additional goods and services increase
the total utility. With example consumer like to have samosa but the second piece of samosa will bring to the
consumer more satisfaction and happy. Then marginal utility will be positive.
Negative marginal utility.
Negative marginal utility refers to when the consumer has too much of an item as consumer require.
consumer consume more item that the consumer require may be harmful. Example third piece of samosa
make the consumer sick.
Zero Marginal Utility
Zero marginal utility refer to consuming more of a good and services bring no extra satisfaction for example
consumer may feel good after having two samosa and after having third samosa consumer will not feel good
so the after having third samosa consumer satisfaction is zero is called zero marginal utility.

Now calculate marginal utility

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Change∈total utlity
Marginal Utility =
change ∈qunatity
OR
Marginal utility = TUn- TUn-1
Now lets calculate the marginal utility of given table in question by using the given
above formula:

Quantity consumed Total Utility

1 20
2 35
3 47
4 55
5 60

Marginal Utility = TUn- TUn-1

Calculation of marginal utility quantity 1st = TUn- TUn-1

= 20-20-1
= -1

Calculation of marginal utility quantity 2nd = TUn- TUn-1

=35-20
= 15

Calculation of marginal utility quantity 3rd = TUn- TUn-1

= 47- 35
= 12

Calculation of marginal utility quantity 4th = TUn- TUn-1

= 55-47
= 8
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Calculation of marginal utility quantity 5th = TUn- TUn-1

= 60-55
= 5
Here is Marginal utility of given table:
Quantity Consumed Total Utility Marginal Utility
1 20 -1
2 25 15
3 47 12
4 55 8
5 60 5

AVERAGE UTILITY
Meaning:
It is utility in which the total unit of consumption of commodity is divided by
number of total utilities.

Average utility = TU÷ Q

Where
AU = Average Utility
TU = Total Utility
Q = Unit of commodity
Calculation of the average utility according to given information:
Quantity Consumed Total Utility Marginal Utility
1 20 -1
2 25 15
3 47 12
4 55 8
5 60 5

Average utility for 1st quantity = TU÷ Q

= 20÷ 1
= 20

Average utility for 2ndquantity = TU÷ Q

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= 35÷ 2
= 17.5

Average utility for 3rd quantity = TU÷ Q

= 47÷ 3
= 15.66

Average utility for 4th quantity = TU÷ Q

= 55÷ 4
= 13.75

Average utility for 5th quantity = TU÷ Q

= 60÷ 5
= 12

Final table of Marginal Utility and Average

Quantity Total Marginal Average
Consumed Utility Utility Utility
1 20 -1 20

2 35 15 17.5

3 47 12 15.66

4 55 8 13.75

5 60 5 12
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