Question

 

1.Like price elasticity of demand, the price elasticity of supply can be measured in terms of changes in total revenue.” True or False.

2. Name two instances where optimizing requires the concept of the “margin”. ?

3. Why is the utility maximizing rule optimal?

                                                   

Answer 1

 

1) False

The price elasticity of supply cannot be measured in terms of changes in total revenue like price elasticity of demand. . This is because there is direct relationship between price and total revenue i.e they move in same direction regardless of degree of price elasticity of supply. The price elasticity of supply measure percentage change in supply quantity to percentage change in price which determines the change in total revenue. So price elasticity of supply determines change in total revenue and cannot measure in terms of change in total revenue like elasticity of demand.

2) Optimization means to find an alternative which is cost effective by maximizing desired factors and minimise undesirable factors. Examples where optimising requires concept of margin are : Margin based supply chain Optimization - which is based on the desire to deliver more high profit products to customers and ability to stop serving customers and products which give low profits. This is done to maximize profits and margin.The other example where optimising requires concept of margin is Initial margin optimisation - provide financial institutions to manage margin requirements . It helps to manage liquidity risk while reducing funding Costs. It provides efficient clearing process in financial institutions.

3) Utility maximizing rule is to purchase those items that give greatest or maximum marginal utility per dollar which is affordable within the budget. The maximum marginal utility is reached when marginal utility gained from last dollar spent is equal to goods and services purchased. Thus this rule is an optimal.