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Budget Line and Consumer Choice Analysis

The document consists of four questions related to economic concepts such as budget lines, utility maximization, income elasticity of demand, and demand functions. It includes calculations and diagrams to analyze consumer behavior and preferences regarding goods X and Y, as well as the demand for a book. Each question requires specific numerical answers and explanations based on given data.

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Ahmed Ali Khan
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32 views1 page

Budget Line and Consumer Choice Analysis

The document consists of four questions related to economic concepts such as budget lines, utility maximization, income elasticity of demand, and demand functions. It includes calculations and diagrams to analyze consumer behavior and preferences regarding goods X and Y, as well as the demand for a book. Each question requires specific numerical answers and explanations based on given data.

Uploaded by

Ahmed Ali Khan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Q1)

10
i) Expalin in words what the budget line is.
ii) Suppose we have two goods. The price of good X is 10 and the price of good Y
is 15. The income is 30. Construct a diagram, with the quantities on the X and
Y axis and draw a budget line in the diagram.
iii) Umais has limited income which he spends on goods X and Y, market price of
X is Rs. 15 per unit and Y is Rs. 20 per unit. When he draws his budget line, its
X intercept at 50 units. Find Amir’s income and slope of his budget line.

Q2) Assume that Mr. Haroon has Rs. 10 to spend on books and foods each month and that both
goods must be purchased whole (no fractional units). Foods cost Rs. 1 each, and books cost
Rs. 2 each. Haroon's preferences for foods and books are summarized by the following
information: 05

Units of MU of Foods MU of
good Books
consumed
1 13 14
2 11 12
3 10 11
4 8 10
5 7 9
6 6 8
7 3 6
8 2 4
9 0 3
10 -5 1

What quantity of books and what quantity of foods will maximize Haroon's level of
satisfaction? Explain briefly.

Q3) If a consumer’s daily income rises from Rs. 300 to Rs. 350, his purchases of a good X
increases from 25 units per day to 40 units.
05
i) Calculate the income elasticity of demand for X
ii) What does your estimate indicate about the nature of X.?

Q4) A publishing company plans to publish a book. From the sales data of another publisher
of similar books, it works out the demand function for the book as:
05
Qd = 5000 – 5P
i) Draw the Demand curve
ii) Find the number of book sold at P = Rs. 25
iii) Find Price for selling 2500 copies
iv) Find price for zero sales
v) Find consumer surplus when market price is 500

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