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ECONOMICS ASSIGNMENT

Economics Assignment

Economics Assignment

Section C: Problems

1. (A) list all the possible combinations of the two goods that Tom can purchase each week with his allowance.

Pizza Slices (€6 per slice)

Movie Rentals (€3 per rental)

Total

4

0

24

3

2

24

2

4

24

1

6

24

0

8

24

(b) How many pizzas and how many movie rentals should Tom consume each week? What is Tom's marginal rate of substitution at that combination? [20 marks]?

The marginal rate of substitution will show how much Tom is willing to substitute pizza for movie rentals (Hubbard & Brien, 2006). Here, we take Pizza giving utility for X, and Movie Rental, giving utility for product Y. Both X and Y utilities are reported in Utils. In the table, we calculate the Total Utility (TU) and Marginal Rate of Substitution (MRS). The formula to calculate MRS:

MRS=

Total Utility is measured as the sum of Utils derived from Pizza(X) and Utils derived from Movie Rentals (Y) .

S.No

Pizza/Week

Utils/week from Pizza(x)

Movie Rentals/Week

Utils/week from rentals

Total Utility

MRS

1

0

0

0

0

0

2.00

2

1

20

1

40

60

0.33

3

2

38

2

46

84

0.25

4

3

54

3

50

104

0.29

5

4

68

4

54

122

0.17

6

5

80

5

56

136

0.10

7

6

90

6

57

147

0.00

8

7

98

7

57

155

0.00

9

8

104

8

57

161

0.55

The combinations in serial range 6-9 are not possible due to the budget constraint (Flood & Rose, 2004). Tom could, at maximum, consume 4 pizzas or 8 movies a week, both of which show his €24 budget constraint. In combination 1-5, Tom should choose where his total utility is maximum (Hubbard & Brien, 2006). This makes the '3 pizza, 2 movie rentals' as the ideal point of consumption.

(c) Illustrate your result graphically. [10 marks]

The following diagram illustrates how Tom's switches his behavior over different levels of consumption.

2. John Jones owns and manages a café whose annual revenue is €5,000. The annual expenses are as in the table below.

Expense

Labour

2000

Food and Drin

500

Electricity

100

Vehicle lease

150

Rent

500

Interest on loan for equipment

1000

Total Expenses

4250

(a) Calculate John's annual accounting profit. [5 marks]

Annual Accounting Profit = Total Revenue - Total Expenses

Annual Accounting Profit= €5000 - €4250

Annual Accounting Profit= €750

(b) John ...
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