Question

(a) List and explain the properties of indifference curves.[10 marks]

(b) Explain with the aid of a diagram the income and substitution effects and use the concepts to describe what happens when the price of a product decreases. [10 marks]

(a) Carefully explain what is meant by explicit; implicit; and sunk costs. How are they used to calculate accounting profit and economic profit? [5 marks]

(b) Explain the relationship between total product, marginal product, and average product. [5marks]

(c) Explain the difference between the short run and the long run. [5 marks]

(d) Define economies and diseconomies of scale and explain why they occur.

Answer 1

ANSWER-1)

The properties of indifference curves are discussed as follows:

1) Indifference curve have negative slope which means that it slope downward to the right. The property is based on the assumption that when consumer increases the amount of one good in the combination, the amount of the other good is reduced. This must be so if the level of satisfaction of consumer remain the same on an indifference curve too.

2) Indifference curves are convex and not concave to the origin under the assumption of diminishing marginal utility. As the amount of good X increases, the amount of Y that you would be willing to give up to get one more unit of good X decreases. Thus, it implies that the indifference curves cannot be concave to the origin, that means they will either be straight lines or bulge toward the origin of the indifference curve.

3) Also the indifference curves cannot intersect with each other. It means that only one indifference curve will pass through a point in the indifference map 1. This property can be very easily proved by first making the two indifference curves cut each other and then showing the self-contradictory or absurdity result it results to.

4) A higher indifference curve indicates a higher satisfaction level than a lower indifference curve thus will be preferred to the combinations in comparison to those which lie on a lower indifference curve