BBEK2103.doc - OUM Business School JANUARY 2017 BBEK2103 Microeconomics MATRICULATION NO 950101125849001 IDENTITY CARD NO 950101125849 TELEPHONE NO

# BBEK2103.doc - OUM Business School JANUARY 2017 BBEK2103...

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OUM Business School JANUARY / 2017 BBEK2103 Microeconomics MATRICULATION NO: 950101125849001 IDENTITY CARD NO. : 950101125849 TELEPHONE NO. : 0168226118 E-MAIL : [email protected] LEARNING CENTRE : Sabah Learning Centre The indifference of curve 1
When the choice involves only two goods, that is, good X and good Y, an indifference curve will show the various combinations of the good X and good Y that can give equal satisfaction to the customer. Assume that you seek out the help of a friend to choose his preferred combination of the two combinations of the good X and good Y. Combination A = 2 units of X + 6 units of Y Combination B = 2 units of X + 4 units of Y Your friend will definitely choose combination A because although the quantity of X is the same in the both combinations, the combination A has more of the good Y. if we assume that combination A is chosen, then we know that any other combination with more of good X or Y or more of both goods, will definitely be preferred than combination A. What if the choices involve the combination C with three units of X and five units of Y? Even through the quantity of Y in the combination C is less compared to combination A, the quantity X is larger. Your friend may be able not to make a choice because he may feel that both combinations (A and C) can give equal satisfaction. When you are able to identify all the combinations that can provide an equal level of satisfaction and connect those combinations together, then we will obtain an indifference curve. Furthermore, if you are able to identity other combinations that can give a higher or lower level of satisfaction and build the particular curve, then you have already formed an indifference map. The budget line You have already seen various types of lines and curves, but what is a budget line? The budget line is important in a difference analysis because it determines the actual choice that will be made by the rational consumers. The indifference curve shows the consumers` priority while the budget line indicates budget constraints or ability to purchase. The budget line is a curve that shows the combinations of two goods that can be purchased by the consumer using a certain amount of the income and the based on the 2
market price of the good. Assume that you have an allocation of RM10 to be spent on good X and good Y where the price of X (Px) is Rm1 and Py = Rm2. The combination of consumption that you can afford to purchase is as shown in table below. If you spend all the money to purchase Y, you will obtain five units of Y; and you will obtain 10 units of X if you decide to spend all of the money on X. You can also choose any of the combinations that satisfies the rule I = PxX + PyY, that is, income (I) is equivalent total expenditure (PxX + PyY). a) The effect of changes in Income Now assume that your income has increased from RM10 to RM20 and the price remains unchanged. The increase in your income will allow you to purchase the maximum amount of 10 units for Y and 20 units for X. Therefore, the budget line 3 Combination X Y A 10 0 B 8 1 C 6 2 D 4 3 E 2 4 F 0 5 Budget Line A B C D E F