# 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.

Question 2

Price

P

A

W R IC2

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

The figure below applies for the case of Sarah

Price

\$10

\$8

\$6 W R IC2

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

37500

26500

C1 IC2

0 C1 C2 25000 35000 Young

37500

26500

C1 IC2

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;

Capital

Isoquant for Q = 1

Isocost, Slope = 0.2

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.