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AASTU Assignment

The document discusses how changes in prices and income affect a consumer's budget line and purchasing decisions. It provides examples of a 10% reduction in prices of goods, an increase in price of one good while others stay constant, and subsidies being provided for goods. It also discusses an individual maximizing utility subject to an income constraint based on their total utility schedule for two goods. Finally, it asks to derive the market demand curve for a good using the individual demand curves of multiple consumers.

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Haymanot Aweke
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77 views2 pages

AASTU Assignment

The document discusses how changes in prices and income affect a consumer's budget line and purchasing decisions. It provides examples of a 10% reduction in prices of goods, an increase in price of one good while others stay constant, and subsidies being provided for goods. It also discusses an individual maximizing utility subject to an income constraint based on their total utility schedule for two goods. Finally, it asks to derive the market demand curve for a good using the individual demand curves of multiple consumers.

Uploaded by

Haymanot Aweke
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
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Addis Ababa Science and Technology University

Introduction to Economics
Assignment II Max. Value 10%
1. Assume a rational consumer has a constant income of M, and decides to consume two
commodities X and Y with prices of Px and Py respectively. Suppose the consumer faces the
following changes (given under A-D). Discuss what effects these changes will induce on the
consumer’s budget line. Use graphs and mathematical illustration wherever appropriate to
support your explanation.

A. A 10% reduction in prices of both goods while income, M remains constant.


B. An increase in the price of good X (Px) while the price of good Y (Py) and income (M)
remain constant.
C. A decrease in the price of good Y (Py) while the price of good X (Px) and income (M)
are constant.
D. If the government decided to provide the consumer a quantity subsidy of 5 birr on good X
and ad valorem subsidy of 12% on consumption of good Y. Compute price elasticity of
demand and supply at market equilibrium in A and B. Also comment on the nature of
elasticities.

2. Suppose Helen has the following total utility schedule for Coffee and tea. Assume that Helen
decides to spend her income of 10 birr on the two goods, where the prices of tea and coffee
per cup are 1 birr and 2 birr respectively.

Quantity (Q) Total Utility (TU) of Total Utility (TU) of


Tea Coffee
1 30 20
2 40 38
3 48 52
4 55 57
5 58 61
6 60 64
7 61 66
Given this information, determine the following.

A. Show that the conditions for this constrained utility maximization are satisfied when this
individual consumer (Helen) is at equilibrium.

B. Compute how much of tea and coffee Helen should purchase to maximize her utility?

C. Determine the maximum total utility that Helen received when she maximizes utility (i.e.
equilibrium). Also compute how much utility Helen would get if she decides to spend all
income on only either tea or coffee?
3. The market for lemonade has 10 potential consumers, each having an individual
demand curve P = 101 - 10Qi, where P is price in dollars per cup and Qi is the
number of cups demanded per week by the ith consumer. Find the market demand
curve using algebra. Draw an individual demand curve and the market demand
curve. What is the quantity demanded by each consumer and in the market as a
whole when lemonade is priced at P = $1/cup?

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