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Homework answers / question archive / Dominic's preferences have the following associated indifference curve as depicted in diagram below Units of Y Units of X ? yo 5 Maior Paren imported From IE (1) Complete and conti Mariage Econo Storije a) Explain the relationship between good X and Y? [3 marks] b) Explain the nature of marginal rate of substitution between good X and Y
Dominic's preferences have the following associated indifference curve as depicted in diagram below Units of Y Units of X ? yo
5 Maior Paren imported From IE (1) Complete and conti Mariage Econo Storije a) Explain the relationship between good X and Y? [3 marks] b) Explain the nature of marginal rate of substitution between good X and Y. [3 marks] c) Assume that Dominic is a utility maximizer. What determines Dominic's demand for good X? [4 Marks] d) Dominic has K4,000 to spend on fanta (Y) and scones(X). The prices of Y = K10 and X = K5 per unit. i. Write the equation for the budget constraint for Dominick. [3 marks] ii. Determine the rate of substitution between Y and X [3 marks] iii. Assume that X and Y are depicted by the preferences of question three (a). Determine which good between X and Y and the quantities that Dominic will [4 Marks] get [Total: 20 Marks] AUROIAVI
a. X and Y are perfect substitute commodities. The indifference curve is a downward sloped straight line when goods are a perfect substitute.
b.Marginal rate of substitution (MRS) refers to that amount of one commodity the consumer is willing to sacrifice in order to get an additional unit of another good. Here as both goods are substitutes MRS remains the same. We can also say that when the indifference curve is a downward sloped straight one MRS is contant.
c. Dominic demand for X depends on the price of X and Y. As two goods are perfect substitutes, Dominic tend to spend entire income on the cheapest good among Xand Y. If X is cheaper than Y, he would buy X only and vice versa.
d,
1.budget constrain is
M=PXX+PYY
M=INCOME
PX=PRICE OF X
PY= PRICE OF Y
X= Quantity of X
Y=Quantity of Y
Dominic budget constraint
4000=5X+10Y
2. MRSX,Y= Slope of Indifference curve
=
3. As Xand Y are perfect substitutes, consumer would spend whole money on Xcommodity as it is the cheaper among the two. This leads to a situation called corner solution
