Question 2A Demand (14 marks)

You have the following tools available to explain the Law of Demand and to derive the Marshallian demand curve: (i) Indifference curves and (ii) budget constraints.

a.Define the two tools (2 marks).

b.Show consumer equilibrium and motivate your answer. What is the equilibrium condition for the consumer? (2 marks)

c.Let the price of one good change and show how equilibrium change (2 marks).

d.Derive the Price Consumption Curve and the Marshallian Demand Curve (6 marks).

e.What is the Law of Demand (2 mark)?

Answer(s):

Question 2BSupply (14 marks)

You have the following tools available to explain the Law of Supply and to derive the short run supply curve for a perfectly competitive firm: (i) Average and marginal product curves and (ii) average and marginal cost curves.

a.Explain why each of the four curves has the shape that it has, and all the possible relationships between the four of them (4 marks).

b.What is the relationship between short run and long run costs? (2 marks)

c.When the average cost curve is equal to the marginal cost curve, what is the slope of the average cost curve (4 marks)?

d.Derive the marginal and average cost curves of a given total cost function (4 marks)