Consumers Equilibrium and Demand Test - 6

Rectangular hyperbola curve said to be unitary elastic as elasticity along the demand curve is same.

To determine the equilibrium point, consumer compares the price (or cost) of the given commodity with its utility (satisfaction or benefit). Being a rational consumer, he will be at equilibrium when marginal utility is equal to price paid for the commodity. 

using percentage method of calculating elasticity

% change in quantity demanded = (50/400)*100 = 12.5%

% change in price = 10%

12,5/10 = 1.25 =ed

As per geomeric method for calculating price elasticity,we can say it can be different.

slope remains constant as it is linear curve but not the elsaticity, it can be different.

An agent's preferences are said to be stronglymonotonic if, given a consumption bundle , the agent prefers all consumption bundles that have more of at least one good, and not less in any other good.

MU & TU relationship  ;

1. MU is the rate of change of TU.
2. When the MU decreases, TU increases at decreasing rate.
3. When MU becomes zero, TU is maximum. It is a saturation point.
4. When MU becomes negative, TU declines

A consumer's preferences are said to be stronglymonotonic if, given a consumption bundle , the consumer prefers all consumption bundles that have more of at least one good, and not less in any other good.

As per total outlay method

(i) If with a fall in price (demand increases) the total expenditure increases or with a rise in price (demand falls), the total expenditure falls, in that case the elasticity of demand is greater than one i.e. ED > 1.

(ii) If with a rise or fall in the price (demand falls or rises respectively), the total expenditure remains the same, the demand will be unitary elastic or ED = 1.

(iii) If with a fall in price (Demand rises), the total expenditure also falls, and with a rise in price (Demand falls) the total expenditure also rises, the demand is said to be less classic or elasticity of demand is less than one (ED < 1).

If elasticity of demand is equal to 1.

then,

% change in price = % change in quantity

there is 50% fall in quantity from 40 to 20 kg.

hence there should be 50% increase in price 

new price = 1.5