Question

1. Why are there so many more proprietorships than​ corporations, yet corporations account for so much more of the sales of business firms in the​ country?

2. Describe the factors that determine own price elasticity of demand.

3. Discuss the substitution effect and the​ real-income effect of a price decrease.

4. Explain what an indifference curve is and what a budget constraint is. How do we find Optimal​ consumption?

Answer 1

Hi there,

Let me answer the question one by one.

1. Following are the main reasons for having more proprietorships than corporations.

• It is the simplest and most common form of business.
• Not a legal entity. i.e. it is owned and controlled by a single person.
• Minimal licenses and relatively less cost to start.
• Easy to form, maintain and transfer to legal heirs.
• Easy to dissolve.

The reasons for having more sales for corporations are as follows.

• They work on a large scale as they are large in size.
• They have high risks; sometimes high risk means high profits.
• They are backed by the shareholders and they can issue shares in order to meet the immediate financial requirement.
• They have a good risk management team to regulate risk and acquire more sales.

2. Following are the factors that determine own price elasticity of demand.

• Availability of Close Substitute, i.e. there will be an elastic demand if the good is having close substitutes and vice versa.
• Income of Consumers, i.e. There will be inelastic demand if the income is high and vice versa.
• Nature of Commodity, i.e. For necessities there will be inelastic demand and for luxuries, elastic demand.
• Proportion of Total Expenditure spent on the product, i.e. if more, there will be elastic demand and inelastic demand if less.
• Number of Uses of the Commodity, i.e. Elastic demand if the uses are more and inelastic if less.
• Time period, i.e. Elastic demand if time period is more and inelastic if less.

3. Substitution Effect

It means that a change in price of a goof brings a change in relative price of other goods whose prices are constant, which in turn brings about a change in the quantity demanded of the good. If price of a commodity falls, the consumer will always consume more of that good because he feels that particular good is relatively cheaper as compared to other goods.

Income Effect

It means that a change in the price of a good will bring about a change in real income i.e. purchasing power of the consumer, which in turn brings about a change in quantity demanded of the good. If the price of a commodity falls, then the consumers real income rises and he will consume more of that good if it is a normal good. With the increase in real income, the consumer will consume less of that particular good if it is an inferior or giffen good. It is because he would like to buy better commodities when the purchasing power is increased.

4. Indifference Curve

An indifference curve is a curve that shows different combinations of two goods that yield the same level of satisfaction or utility to the consumer. It is a downward sloping curve convex to the origin.

Budget Constraint

   The budget constraint shows that a consumer can choose any bundle as long as it costs less or equal to the income one has, given income and price of goods.

Optimal Consumption

Optimal Consumption is determined at a point where one maximises their utility, given income and market prices. It is at the point where the slope of the indifference curve is equal to the slope of the budget line or it must be tangential to the budget line which is,