Running Head: Finance
Student Name
Student Id
Affiliation
Question one.
a.
Budget = $ 160
Bundles to be consumed.
Meat (x) = $10 per unit and Potatoes (y) = $4 per unit.
Amount to spent on Meat purchase (x) = 10/14 x 160
= $ 114
Quantities of meat to be purchased = 114/10 = 11
Amount to be purchased on Potatoes = 4/14 x160
=$46
Quantities of potatoes to be purchased = 46/4 =11
John has a budget constrain because he can only afford 11.4 units of meat and 11 units of potatoes.
If he wants to purchase more of meat, he will have to purchase less of potatoes.
.
if the price of potatoes increases by $ 5 a unit then the optimum budget will change to:
Amount to spent on Meat purchase (x) = 10/19 x 160
= $ 84
Quantities of meat to be purchased = 84/10 = 8
Amount to be purchased on Potatoes = 9/19 x160= $76
Quantities of potatoes to be purchased = 76/9 =8
For John to remain at equili
ium point, he will consume less of the two commodities 8units each.
c.
If John optimum bundle contains ten units of meat. Then:
Budget = $160
Meat =$10 per unit
Potatoes = $ 9 per unit
Meat budget = $10 x10= 100
Potatoes budget =$ 60
Bundles of potatoes to be purchased = 60/9 = 6
John’s new optimal bundle will be 10 meat units and 6 potatoes units.
d.
i. Jane prefers Walnuts over Cashews because her preference order is: Walnuts XXXXXXXXXXAlmonds XXXXXXXXXXCashews.
ii. The two bundles have the same taste and perfect substitute of each other.
iii. June drove much satisfaction from the first Lemon sour and was willing to give more to obtain it. The subsequent Lemons came with fewer tests and he is willing to offer less mint in exchange.
e. Budget = $ 210
Bundles to be consumed.
Pie (x) = $5 per unit and Chips (y) = $2 per unit.
Amount to spent on Pie purchase (x) = 5/7 x 210
= $ 150
Quantities of Pie to be purchased = 150/5 = 30 units
Amount Chips to be purchased = 2/7 x210
=$60
Quantities of Chips to be purchased = 60/2 =30 units
Jack optimal bundles will be 30 units for each commodity per year.
Question two.
XXXXXXXXXXPrice XXXXXXXXXXQuantities demanded XXXXXXXXXXQuantities supplied
XXXXXXXXXX XXXXXXXXXX9 XXXXXXXXXX4
XXXXXXXXXX XXXXXXXXXX7 XXXXXXXXXX12
XXXXXXXXXX XXXXXXXXXX5 XXXXXXXXXX20
The slope of the demand curve =∆ Qty dd/∆Price
XXXXXXXXXX7-9/10-6 =-2/4
= -0.5
Inverse demand curve is given by equation.
XXXXXXXXXXP =-0.5Qd + 14
The slope of the Supply curve = ∆Q ss/∆Price
XXXXXXXXXX12-4/10-6
XXXXXXXXXX8/4
= 2
Supply curve is given by equation.
XXXXXXXXXXP = 2Qs + 6
. Transposing the inverse demand curves in demand function.
XXXXXXXXXXP =-0.5Qd + 14
XXXXXXXXXX0.5Qd =14-P
XXXXXXXXXX0.5/0.5 Qd = 14-P/0.5
XXXXXXXXXXQd = -0.5P + 7
Transposing the inverse supply curve into supply function.
XXXXXXXXXXP = 2Qs + 6
XXXXXXXXXX2Qs= 6-P
XXXXXXXXXX2Qs/-2 = 6-P/-2
XXXXXXXXXXQs = 0.5 P + 3
c. Equili
ium Price and quantity.
Market is at equili
ium where quantity demanded = Quantity supplied.
Qd = -0.5P + 7
Qs = 0.5 P + 3
At equili
ium Qs = Qd
XXXXXXXXXXP + 3 = -0.5P + 7
XXXXXXXXXX = -0.5P-0.5P
XXXXXXXXXX = -P
XXXXXXXXXXP = $ 4
Equili
ium price = $ 4
Equili
ium Quantity= Qd = -0.5P + 7
XXXXXXXXXX0.5 x 4 + 7
XXXXXXXXXX5units.
d.
Equili
ium Price and quantity.
Market is at equili
ium where quantity