Question

1.please explain in details the Lump-Sum principle

2. Cubb- Douglass Utility function

Answer 1

1. Lumpsum means total amount. This term is generally used by big investors who possesss huge sum of money. They generally go for investing the entire money at a point of time. Example:if a big investor is interested in investing the whole sum of money in mutual funds it is an example of lumpsum amount. This is generally done for longer periods to earn more profits such type of payment is also seen in case of pension holders where instead of Payment in longer periods of time, one time payment is accepted Sometimes lumpsum payment is good as compared to annuity as it is beneficial for old aged persons to take lumpsum amount as their life span is not known.

2.cobb-douglas utility function :The cobb-douglas utility function was given by Charles cobb and Paul Douglas during 1927-1947.It was related to production function determining the relation between inputs and outputs It shows the technological relationship between the amount of two or more inputs and the amount of output produced by those inputs . Inputs are generally physical capital and labour As far as utility function is concerned, it determines the consumer preference. It means the behaviour of consumer in the market. Suppose market has only two commodity X and Y. There can be three conditions :

a. Considering the price and income if a consumer spends a certain amount on x commodity then he will spend remaining on Y.

b. A consumer spends equal proportion of income on X and Y.

C. A consumer spends all his income either on X or on Y only.