Question

Suppose roses are not Giffen Goods.

Choose all the TRUE options.

a.If the price of roses rises, consumers will end up on a lower indifference curve between roses and other things.

b. Consumers may buy more roses, even if their prices rise.

c. If the price of roses rises, the opportunity cost of other goods decreases.

d. If the price of of roses rise, the consumers preferences will shift away from roses and toward other things i.e. it will change their indifference curve map between roses and other goods.

Answer 1

Ans) Giffen goods : Giffen goods are highly inferior goods , which shows a highly negative income affect.Which shows that if income increases than demands for such goods decreases. However this means if price of such goods falls their demand also falls .indifference curve shows the locus of all the points which shows different combination of two commodities for example apple and oranges offering the same level of satisfaction to the consumer.

Ans a. True) Since Rose is not a giffen good and it has other substitute as Jasmine and lilly etc.The indifference curve or rose and its substitute slopes downward from left to right . It means if a consumer decides to have more of one good , then he must have less of other. Here due to increase in price if consumer decides to consume less of rose than the substitute of rose that is lily for example is purchased more.Suppose at Point A on the indifference curve consumers are purchasing 4 roses and 6 lily flower and if they decided to lower the consumption of roses to 2 roses and increase the consumption of lily to 8 then the new point on the indifference curve is B hence it is lower than point A given that roses are on Y axis and lily or some other product on X axis on the indifference curve diagramme.

Ans b. True ) It can be true that the consumers will buy more of roses even if their prices continue to rise as because of exception to the law of demand. The law of demand says that other things keeping constant if the price of a commodity rises than its demand falls and vice verse. But the exception to it are Preferences and fashion which does not follow law of demand if rose is a fashion for love and people prefer rose.

Ans c. True ) Opportunity in economics is the cost of the best alternative forgone. In this case the opportunity cost of rose is the cost of lily as the consumer has purchased rose. Let the price of Rose be 10 $ and lily is 7$ then if a cosumer purchase rose than the opportunity cost for selecting rose is :: Cost of lily forgone / cost of rose selected

Here Opportunity cost = 7/10 = $0.7 and Opportunity cost of selecting lily and forgoing rose is :: cost of rose /cost of liuly = 10/7 =$1.4 if the price of rose rises to $ 12 keeping the price of lily as $7 then opportunity cost of selecting rose is : cost of lily /cost of rose = 7/12= 0.58 hence opportunity cost decreases.

Ans d.True ) Indifference Map refers to a set of indifference curves corresponding to different income level of consumers or we can say that it a collection of indifference curve.It is to be taken into account that the indifference curve are parallel and higher indifference curve shows higher satisfaction.Consumers would prefer to move in the increasing indifference curves higher towards right inorder to increase satisfaction hence if consumers reduces their preferences from Roses to other goods than it will lead to a higher indifference curve in the indifference map