Question

PLease answer the questions in brief with graphs.

A change in relative prices will always change a utility maximizing consumer’s marginal rate of substitution.

1b) Competitive firms shutdown production when price falls below the minimum of the average total cost curve.

1c) An increase the price of firms output will always increase the use of an input.

1d) An import tariff on a commodity will increase the price for the producers of the commodity producers in the exporting country.

1e) When ending stocks are large, prices tend to be very unstable.

Answer 1

a)A change in relative prices of the commodities will result in a change in the slope of the budget line.

Assume that consumer can buy good A or good B using his income. Given the budget line consumer chooses point 1 on the graph.when the money price of good 1 falls,while income and price of good 2 remains unchanged.The budget line pivots to AC and a further fall in the price will shift it to AD.Two more points of equilibrium labelled 2 and 3 can be identified as tangents of AC and AD with indifference curve I1 and I2.The quantity of good 1 consumed rises to q1 and then to q2 at lower prices of good 1.if we move the budget line through all possible prices of good 1 and join all the points of equilibrium, we derive what is called price consumption curve.

b) if the market price that a perfectly competitive firm faces is below minimum average variable cost the firm should shut down its operations as shown in the diagram below.

c) as per the law of supply itself, quantity supplied increases with price.As a result there will increased use of inputs in the production of commodity.

d)

Import tariffs are part of trade restrictions imposed to discourage imports

e)prices are really unpredictable, they are effected by a number of factors. The prices can be volatile, and there may be no rhyme or reason to their movements.

The fluctuations may happen due to fundamental state and technical condition of the commodity market.One such reason is the existence of large ending stocks.