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ECON 101: Principles of Microeconomics - Discussion Section Week 10 TA: Kanit Kuevibulvanich Important Concepts • Income and Substitution Effect - Production and Cost Problems 1. A consumer has income of $3,000. Wine costs $3 per glass, and cheese costs $6 per pound. a. Draw the consumer's budget constraint (put cheese on the horizontal axis). What is the slope of this budget constraint? b. Suppose his income increases from $3,000 to $4,000. Show what happens if both wine and cheese are normal goods. c. Now show what happens if cheese is an inferior good. d. The price of cheese rises from $6 to $10 per pound, while the price of wine remains $3 per glass. For a consumer with constant income of $3,000, show what happens to consumption of wine and cheese. Decompose the change into income and substitution effects. e. Can an increase in the price of cheese possibly induce a consumer to buy more cheese? Explain. 2. A chocolate factory has total production cost (TC) given by the equation TC = 300 + 150 where Q is the number of bars of chocolate produced. a. What is the total fixed cost and what is the total variable cost? b. Write the equations of average total cost (ATC), average variable cost (AVC) and average fixed cost (AFC) and draw the ATC, AVC and AFC curves c. What is the marginal cost (MC) for this factory? d. If the factory produces 50 bars of chocolate, find its total fixed cost, total variable cost and marginal cost. e. Ignoring the existence of fixed cost and based on the ATC curve, does this firm have increasing, constant or decreasing return to scale? 3. Kate Smith provides catered meals, and the catered meals industry is perfectly competitive. Kate's machinery cost $100 per day and is the only fixed input. Her variable cost consists of the wages paid to the cooks and the food ingredients. The variable cost per day associated with each level of output is given in the table. Find total cost, average variable cost, average total cost and marginal cost. At what quantity or range of quantities does the minimum of ATC occurs? Q TVC TC AVC ATC MC $0 $200 $300 $480 $700 $1,000

Answer 1

Ans-(1) m= 3000$ Pw= $3. Pc = $6 a) Budget Constraint equahon. I W pwtc. pc = m general ( 136 + 6C = 3000 specific to our case. I For Vertical and Horizontal intercepts at x-axis w=0 =) C = 500 1333.337 1200 Scope=-2. 1000 800 600 slope = -2 400 at 200 y-axis c=0 =) W=1000 - ) C 0 200 400 600 800 500 666-67 Scope = - Pc =-6 = -2. obw

(b) m = 3000 m2 = 4000 (is from we have 3w+6C = 4000 axis's at x-axis w=0 an increcise in income from => c= 666.67 3000 to 4000 Leads To at y-axis C=0 Shift in Budget Construint =) o = 1333.33 outward winn same stole. And quantity of Both goods consumed are increased if consumer (for example) Pocviously consuming at x-axis (Horizontal axis) We he were consuming 500 units of cheese how he can consume 666.67 units. Because of Both goods are normal goods OR Since Utilin function is not given we can take an arbitrasy optical Point. et For Previous (a) Scenario and et for case (b). w 14001 Both of the quant good's quantity increases. - Cheese 200 400 600 800 1000

to it cheese is injenior good. So as increase income increases the quantity of Cheese decrecies wine with m=4000 - - - t ---- → Cheese 200 400 Goo 800 $6 to $ 10 per (I. as Price of Cheese Rise from Pound. m = $3000. Budget constraint 3 w tloc= 3000 Axis's sofe – Pc = -10 = - 3.33 At horizontal w=0 = (=300 kw 3 at vertical C =0 = W=1000

1400 12000! -- looo - - 900 - 800 - ----- - 700 - ---- 200 v loom -> Cheese 100 200 300 400 500 14 Substitution Effect Income e77ect for Substitution effect Assume at e* = (300, 400) as be increase from 6 to 10$ We needed. 300 (+4)= 1200 more dollars to consume Same Bundle. So m= 3000 +1200 = 4200 Vertical intercept 30 + 10 c=4200 = c = 0 = W = 1400 wao =) c=420

@ Yes it is possible only when Cheese is considered as giffen good. So as price of Cheese ( giften good ) increases Consumer will demand more of Cheese Leads to more consumption of cheese Ars-2 TC = 300+ 159 (a) TFC= 300 e TVC = 159 (b) TC= 300+ 159 Dividing this equation by q we have TC = 3000 + 15 9 9 ATC = AFC + AVC.

Costa ATC. • AVC AFC output (C) TC (9+2) = 3006+ 15(2) = 3000+ 30 = 3030 330 TC (9-3) - 3004 + 15(3) = 3045 3045 mc= TC (9=38- Tc (0-2) = 3445-3036 = 15. (d) Q = 50 TC = 3000 + 15(50) = 300+ 750 = 1050 TEC= 300 TOC = 750.

(e] ATCAIS TC = 300+ 159 without fixed cost TC = 159 ATC= 15 =) constant Returns To Scale. Ans- (3) 9 TUG 0 0 *10 200 20 300 mc - ATC 0 210 AVC 0 20 15 2000 TC 100 2100 6100 14500 28100 50100 300 6100 305 483.3 480 4000 scf0o 8400 13600 22000 40 50 700 1000 17.5 20 702.5 1002 * min. of ATC.
in substitution and income effect if you dont get my point pls ask in comment i will glad to explain you thank you !