Unit Code Essay Example

Consumer Theory

Unit Code

Question 1

  1. It is an inferior good since as the income falls, demand for the clothing went up.

  2. The quantity of used clothing bought will go up. A fall in price will cause people to buy more of the good.

  3. For any good, a fall in price leads to a certain increase in the quantity demanded of the good. As such, people will buy more of the good through a substitution effect. On the other hand, used clothing is an inferior good. Therefore, a rise in income will cause people to buy less of the good since their purchasing power will rise and they will opt to buy superior goods. The income effect of the used clothing is, therefore, negative.

Unit CodeUnit Code 1Question 2

Unit Code 2Price

Unit Code 3Unit Code 4P

Unit Code 5Unit Code 6A

Unit Code 7Unit Code 8Unit Code 9 W R IC2

Unit Code 10 0 M N S L1 B L2 Quantity

From the figure above, Q and R represent the indifference curves. PL1 and PL2 are the budget lines.

A fall in income will increase demand for the used clothing the quantity demanded will increase from OM to ON.

Question 3

Unit Code 11Unit Code 12The figure below applies for the case of Sarah

Unit Code 13Price

Unit Code 14Unit Code 15$10

Unit Code 16Unit Code 17$8

Unit Code 18Unit Code 19Unit Code 20$6 W R IC2

Unit Code 21 0 M N S L1 B L2 Quantity

As indicated in the figure above, Sarah’s labour supply is upward-sloping when the wage is between $6 and $8 per hour. However, it is backward sloping when the wage is between $8 and $10 per hour.

Question 4

Unit Code 22Unit Code 23Unit Code 24

Unit Code 2537500

Unit Code 2626500

Unit Code 27Unit Code 28Unit Code 29Unit Code 30 C1 IC2

Unit Code 31 0 C1 C2 25000 35000 Young

Unit Code 32Unit Code 33Unit Code 34

Unit Code 3537500

Unit Code 3626500

Unit Code 37Unit Code 38Unit Code 39Unit Code 40 C1 IC2

Unit Code 41 0 C1 C2 25000 Young

Question 5

The firm will have an isoquant which is a straight line with a slope of -1 and intercept at K = 4 and L = 4. This is shown in figure below;

Unit Code 42Unit Code 43Capital

Unit Code 44 Isoquant for Q = 1

Isocost, Slope = 0.2

Unit Code 45 Cost minimising corner solution

When the isocost line, TC = 22L + 110K is plotted with capital (K) on the y-axis labour (L) on the x-axis, it has a slope of -22/110 = -0.2 with intercepts at K = TC/110 and L = TC/22. The firm will be able to minimise cost, where L = 4 and K = 0, with a total cost of 22(4) + 110(0) = $88.