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ECONOMICS

Economics

Economics - Economical Analysis

a) Mark has been consuming only pasta worth of 40p per kg and bread worth of 20p per kg an income of £10. The following is the budget line for Mar.

M = £10

Pp = 40p per kg

Pb = 20p per kg

Mark's budget line

Budget slope

Slope = m

Y = Mx + C

M = £10

Y- Axis Pp = 40p per kg

X- Axis Pb = 20p per kg

Y = mX + c

0.4y= -0.2 + 10

y= -0.2/0.4x + 10/0.4

y = - 0.1/0.2x + 25

y = - 0.5 x + 25

y = - 0.1/0.2 x

Slope = - 0.5

If income is M = £10

Then 10/ 0.2 = 50 items of Bread

10/0.4 = 25 items of Pasta

b. As consumer income reduce consumer purchasing power will also reduce i.e. he won't be able to purchase higher combinations of goods. Hence, decrease in consumer income will result budget line to shift (Lipsey & Harbury 2012, p. 110).

Current income = £ 10

Income reduce = £ 5

If income is M = £5

Then 5 /0.2 = 25 items of Bread

5 / 0.4 = 12.5 items of Pasta

c. When price of Y-axis falls, the budget line out while making its flatter like reduction in price of pasta reduce from 20p per kg from 40p per kg, the following would be the picture of graph. As price of pasta will reduce we will able to purchase more of bread item (Himmelweit, Simonetti & Trigg, 2001, p. 28).

d) If mark decided to maximizes his utility, given his income and the current prices and decides to consume 30kg of bread. Then following would be scenario:

If income is M = £10

Then 30/10 = 3 items of Bread and less pasta items will be purchased

e. As the price of pasta falls from 40p to 20p per kg and mark consuming 30 kg of bread, he would be consuming more pasta i.e.

M = £10

Pp = 20p per kg

Pb = 30p per kg

He would be consuming

Pasta: 10 / 0.2 = 50

Bread: 10 / 0.3 = 33.33

f. The following shows the substitution, income, and total effects of price increases and decreases for inferior goods (Himmelweit, Simonetti & Trigg, 2001, p. 28).

When price of pasta fall the budget constraint pivots outward with axis determine the quantity of pasta. Consumer would be moving from utility maximizing consumption bundle A to utility maximizing consumption bundle B. This will decrease prices due to movement effect (Himmelweit, Simonetti & Trigg, 2001, p. 28).

In order to see substitution and income effects, dotted line indicates ample income for getting back original indifference curve

g. Inferior goods are those whose demand reduce when income of consumer increase. Bread is inferior goods since income rise consumer would be moving towards more nutritious foods consumption and prices for bread will reduce. Pasta is also Normal goods (Himmelweit, Simonetti & Trigg, 2001, p. 28).

Assignment 2

Consumers are the kings and queens of a market economy. They exercise, ultimately, full sovereignty over the companies and their ...
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