Consumers Equilibrium and Demand Test - 9

Calculation of new partner’s capital should be done as follows:

• Calculated the combined or adjusted capitals of all the existing partners (after all adjustments)
• Find out the reciprocal of remaining share
• Now, combined capitals x reciprocal of remaining share x new partner’s share

Indifference curve is defined as the locus of points on the graph each representing a different combination of two substitute goods, which yield the same utility or level of satisfaction to a consumer. The combinations of goods give equal satisfaction to a consumer.

Consumer choice and demand for a product are influenced by the price of the product itself and the consumer's income. These factors directly impact a consumer's ability and willingness to purchase a product.

Utility is a subjective concept and varies from person to person, at different times and at different places. There cannot be a standardized measure for utility. Therefore, the point that utility always measurable is not true.

Equilibrium in an economy occurs when aggregate demand is equal to aggregate supply. This means that the total demand for goods and services in the economy matches the total supply available. When aggregate demand exceeds aggregate supply, it creates a shortage, leading to upward pressure on prices. Conversely, when aggregate demand is less than aggregate supply, it results in a surplus, prompting downward pressure on prices. Only when aggregate demand equals aggregate supply do prices stabilize, signaling the attainment of equilibrium in the economy.

Given that the price elasticity of demand for the good is -0.2, this indicates an inelastic demand. Inelastic demand means that the percentage change in quantity demanded is less than the percentage change in price.

When there is a 10% increase in the price of the good, according to the price elasticity of demand formula, the percentage change in price is +10%. Since the demand is inelastic, the percentage change in quantity demanded will be less than 10%. Specifically, it will be -0.2 times the percentage change in price, which is -0.2 × 10% = -2%.

Now, to calculate the change in expenditure, we use the formula:

Change in expenditure = Percentage change in quantity demanded × Percentage change in price

Substituting the values, we get:

Change in expenditure = -2% × 10% = -0.2%

Since the change in expenditure is negative, it means that expenditure will decrease.

The income effect is the change in the quantity demanded of a good resulting from a change in consumer income, assuming that the prices of goods remain constant.

Given,

Initial demand \(=400\) units

Final demand \(=450\) units

Percentage change in price =\(-10 \%\)

Using the formula for calculating price elasticity of demand:

Price elasticity of demand =\( \frac{(Percentage \; change \; in\; quantity \;demanded) }{ (Percentage \;change \;in \;price)}\)

Percentage change in quantity demanded = \((\frac{(Final \; demand- Initial\; demand) }{ Initial \;demand}) \times 100 \%\)

\(=(\frac{(450-400) }{ 400}) \times 100 \% \)

\(=12.5 \%\)

Percentage change in price \(=-10 \%\)

Price elasticity of demand \(=(12.5 \% -10 \%)=-1.25\)

Factors such as consumer preferences, price of related goods (substitutes and complements), and income of consumers typically influence the demand schedule. However, government regulations usually affect the market equilibrium and quantity traded rather than directly influencing the demand schedule.

The law of variable proportions asserts that when one factor of production is increased while keeping other factors constant, the marginal product of the variable input will eventually decrease. Initially, as more units of the variable factor are added, the marginal product may increase due to the principle of increasing returns. However, beyond a certain point, diminishing returns set in, causing the marginal product to decline. This occurs because the fixed factors become relatively scarce in proportion to the variable factor, leading to inefficiencies in production.