Explain the law of diminishing marginal utility with the help of a total utility schedule.
According to the Law of Diminishing Marginal Utility, marginal utility of a good diminishes as an individual consumes more units of a good. In other words, as a consumer takes more units of a good, the extra utility or satisfaction that he derives from an extra unit of the good goes on falling.
Schedule showing diminishing marginal utility
No: of Dose consumed per day.
Give two examples of fixed costs.
1) Cost of land and building.
2) Cost of machinery.
Define marginal cost.
Marginal cost is the change in the total cost that arises when the quantity produced is incremented by one unit, that is, it is the cost of producing one more unit of a good.
Given the meaning of market demand.
The market demand for a good at a particular price is the total demand of all consumers taken together.
When is the demand for a good said to be inelastic?
Inelastic demand is a situation in which the demand for a product does not increase or decrease correspondingly with a fall or rise in its price.
Under which market form a firm’s marginal revenue is always equal to price?
Under Perfect Competition, marginal revenue is always equal to price.
|Units of labour||Average Product (Units)||Marginal Product (Units)|
|Units of Labour||Average Product (units)
(Total Product * units of labour)
(Avg Pdt * units of labour)
|2||10||12(20 - 8)||20 (10 x 2)|
|4||9||6 (36-30)||36 (9 x 4)|
|6||7||2 (42 - 40)||42 (7 x 6)|
When the price of a good rises from Rs 20 per unit to Rs 30 per unit, the revenue of the firm producing this good rises from Rs 100 to Rs 300. Calculate the price elasticity of supply.
|Price (Rs)||Quantity (uts)||Revenue (Rs)|
Price elasticity of supply (eS) = Percentage change in quantity supplied/ Percentage change in price.
% change in quantity supplied = (change in quantity supplied / Initial quantity supplies)* 100 = (5/5)*100 =100
% change in price = (change in price/ initial price)*100
(10/20)*100 = 50
Price elasticity of supply (eS) = Percentage change in quantity supplied/ Percentage change in price = 100/50 = 2
Explain the difference between an inferior good and a normal good.
Normal Goods: The quantity of a good that the consumer demands can increase or decrease with the rise in income depending on the nature of the good. For most goods, the quantity that a consumer chooses increases as the consumer’s income increases and decreases as the consumer’s income decreases. Such goods are called normal goods. Thus, a consumer’s demand for a normal good moves in the same direction as the income of the consumer. For example, clothing is a normal good. As income increases, the demand for clothing increases.
Inferior Goods: The goods for which the demand moves in the opposite direction of the income of the consumer are called inferior goods. As the income of the consumer increases, the demand for an inferior good falls, and as the income decreases, the demand for an inferior good rises. Examples of inferior goods include low quality food items like coarse cereals. As the income increases, the consumer reduces its demand for coarse cereals and instead shifts its demand towards superior quality cereals.
Explain the condition of consumer’s equilibrium with the help of utility analysis.
Consumer’s Equilibrium in case of Single Commodity:
The Law of Diminishing marginal utility can be used to explain consumer’s equilibrium in case of a single commodity.
A consumer purchasing a single commodity will be at equilibrium, when he is buying such a quantity of that commodity, which gives him maximum satisfaction. The number of units to be consumed of the given commodity by a consumer depends on 2 factors:
1. Price of the given commodity;
2. Expected utility (Marginal utility) from each successive unit.
To determine the equilibrium point, consumer compares the price (or cost) of the given commodity with its utility (satisfaction or benefit). Being a rational consumer, he will be at equilibrium when marginal utility is equal to price paid for the commodity.
Hence the consumer attains equilibrium when, Marginal Utility of a Rupee spent on the commodity = Marginal Utility of Money