Explain the concept of consumer equilibrium

1. A.  Explain how one derives (gets) the indifference curves from a 3-dimensional utility function. Draw a graph and explain. Which principle explains the concave shape of the utility function? Why?

B. Explain the concept of Consumer Equilibrium.  How does it relate to utility maximization?  Draw a graph and show where consumer equilibrium occurs.  Write down the equation that holds at the consumer equilibrium.

C. Explain how one can derive (get) the Law of Demand from Consumer equilibrium.

D. Assume that there are 2 goods, X and Y and P(X) = $20 and MU(X) = 100, and p(Y) = $50.  Assuming that the consumer is currently maximizing her utility, compute MU(Y).

SHOW THE EQUATION YOU USE AND SHOW YOUR COMPUTATION.

2. A. Define and explain Short Run cost curves (TOTAL, AVERAGE AND MARGINAL COST CURVES).  DRAW GRAPHS AND LABEL EACH CURVE ON THE GRAPH. Explain the “law of diminishing returns”. State the economic reason behind it.

B. Explain the Long Run Average Total Cost curve. Explain the concepts of Economies of Scale; Constant Returns to scale; Diseconomies of scale. Draw a graph.

3. A. “The second hamburger tests as good as the first hamburger”. Which principle does this statement violate? WHY? Explain briefly.

B. “The more I eat, the hungrier I get”. Draw the Utility function for this statement. Which is the shape of the Utility Function in this case?

4. A. Explain why the Marginal Cost curve (MC) cut the Average Total Cost curve at the lowest (minimum) point. Use the example of GPA and Semester Average to explain it.

B. Draw the TC = TFC + TVC curves. Explain why the shape of the TC curve is concave first and becomes convexlater: STATE THE REASONS BEHIND THESE SHAPES. (Note: you need to state 2 reasons).

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