ECO402 ASSIGNMENT NO 1 SOLUTION

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spring 2011 assignment solution



Question no 1:
a. Ali has certain amount of money and he has to spend on two goods apple
and strawberries. Suppose Ali completely prefers strawberries than apple.
How you will see this particular situation in the consumer equilibrium
theory?
b. Support your answer with the help of graph.
(Marks: 2+3)


For the first question the answer is "corner solution.” As according to the corner solution ,if a consumer buys in extremes and buys all of the one category of good mean completely prefer one good over the other .In this situation the indifference curves are tangent to the horizontal and vertical exis.For the graph look in the lecture number 8 page no 50 in the topic of corner solution.


Question no 2:
Keeping in view the given data for the construction of roads from the year 2000
to year 2004, calculate the nominal price for the roads construction in each year.
Note:
Take year 2000 as base year where required.


For question number 2 the formula is given as follows

Nominal price = CPI (current year)/CPI (base year)*Real price.
Here is the solution for the first year. Solve others by similar formula.
Nominal Price for the year 2000 = 45.5/45.5*5550

Nominal Price for the year 2000= 5550