Quiz 6: Elasticity

Business

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A budget line shows various combinations of two commodities which can be purchased with a given budget at given prices of the two commodities. When money income increases then budget line shifts to the right because consumer will have more money to spend and hence their budget will increase. When money income decreases then budget line shifts to the left means inward because consumer will have less money to incur and hence their budget will decrease. When the price of the product on the horizontal axis increases then budget line on horizontal axis will shift to the left but budget line on vertical axis will remain unchanged. When the price of the product on the horizontal axis decreases then budget line on horizontal axis will shift to the right but budget line on vertical axis will remain unchanged.

Putting into a table the information that we are given, we have: img To find marginal utility for each repetition, which just means the additional amount of utility gained (note that the additional utility gained could be negative) from repeating the song one more time, we have to find the increase in utility from each repetition. img We see that the total utility of this person starts to decrease when singing the song for the third time (as evident by total utility going from 90 to 70). This corresponds to the negative marginal utility we start seeing after she sings twice. Having negative marginal utility means that you are less happy with each additional repetition and the effect is bigger the more times the song is repeated. So we see that after the second repetition, each additional repetition hurts more than the previous time (in terms of utility).

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