Categorize the goods as substitute, complementary and unrelated goods. Concept Introduction: Substitute goods are those goods which can be used in place of each other. Increase in the price of one good implies the increase in the demand of other good and vice-versa. Complement goods are those which can only be used together. We can’t use one good at a time. Increase in the price of one good implies the decrease in the demand of other good and vice-versa.

Question

1. Riaz has a limited income and consumes only Apple and Bread. His current consumption choice is 3 apples and 5 bread. The price of apple is $3 each, and the price of bread is $2.5 each. The last apple added 5 units to Sadid's utility, while the last bread added 7 units. Is Riaz making the utility-maximizing choice? Why or why not? Do you suggest any adjustment in Riaz's consumption bundle? Why or why not? Give reasons in support of your answer. State the condition for a consumer's utility maximizing choice and illustrate graphically.

Answer 1

Question

Chapter 4, Problem 2P

To determine

Categorize the goods as substitute, complementary and unrelated goods.

Concept Introduction:

Substitute goods are those goods which can be used in place of each other. Increase in the price of one good implies the increase in the demand of other good and vice-versa.

Complement goods are those which can only be used together. We can’t use one good at a time. Increase in the price of one good implies the decrease in the demand of other good and vice-versa.

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1. Riaz has a limited income and consumes only Apple and Bread. His current consumption choice is 3 apples and 5 bread. The price of apple is $3 each, and the price of bread is $2.5 each. The last apple added 5 units to Sadid's utility, while the last bread added 7 units. Is Riaz making the utility-maximizing choice? Why or why not? Do you suggest any adjustment in Riaz's consumption bundle? Why or why not? Give reasons in support of your answer. State the condition for a consumer's utility maximizing choice and illustrate graphically.

2. Consider the following table of long-run total costs for three different firms: Quantity Total Cost ($) Firm A Firm B Firm C 1 60 11 21 2 70 24 34 3 80 39 49 4 90 56 66 5 100 75 85 6 110 96 106 7 120 119 129 Does each of these firms experience economies of scale or diseconomies of scale? Explain your answer with necessary calculations.