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 ...