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1. (i) Explain the Equi-Marginal Principle of consumer behaviour - Leaving Cert Economics - Question 1 - 2012
Question 1
1. (i) Explain the Equi-Marginal Principle of consumer behaviour. (ii) State and explain three other economic assumptions used to analyse consumer behaviour. (b) A ... show full transcript
Worked Solution & Example Answer:1. (i) Explain the Equi-Marginal Principle of consumer behaviour - Leaving Cert Economics - Question 1 - 2012
Step 1
Explain the Equi-Marginal Principle of consumer behaviour
Answer
The Equi-Marginal Principle posits that consumers will allocate their income among different goods in such a manner that the ratio of marginal utility to price is equal for all goods consumed. Thus, to achieve maximum satisfaction, consumers distribute their spending until the marginal utility per monetary unit spent is identical across all goods. This ensures that consumers gain the highest overall utility from their available resources.
Step 2
State and explain three other economic assumptions used to analyse consumer behaviour
Answer
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The consumer has a limited income: Consumers face constraints due to their limited financial resources. Hence, they must prioritize their purchases based on needs and preferences.
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The consumer acts rationally: Rationality implies that consumers make choices aimed at maximizing their satisfaction. If faced with similar commodities, a rational consumer will opt for the product that provides the greatest utility for the lowest price.
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The consumer is subject to the law of diminishing marginal utility: As consumers purchase more units of a good, the additional satisfaction (marginal utility) derived from each subsequent unit tends to decrease. This principle guides consumers to consider both the utility gained and the cost involved in subsequent purchases.
Step 3
Product A: -2.8
Answer
The price elasticity of demand for Product A is elastic.
- Change: Decrease the price.
- Reason: A decrease in price will lead to a proportionately larger increase in quantity demanded.
- Effect on Total Revenue: Total revenue will increase as the percentage increase in demand exceeds the percentage decrease in price.
- Demand Curve: Illustrate this with a downward-sloping demand curve.
Step 4
Product B: -1.0
Answer
The price elasticity of demand for Product B is unit elastic.
- Change: Leave the price unchanged.
- Reason: Any change in price will not affect total revenue as the percentage change in demand will equal the percentage change in price.
- Effect on Total Revenue: Total revenue will remain unchanged.
- Demand Curve: Illustrate this with a demand curve where total revenue remains constant.
Step 5
Product C: -0.5
Answer
The price elasticity of demand for Product C is inelastic.
- Change: Increase the price.
- Reason: An increase in price will lead to a smaller percentage decrease in quantity demanded.
- Effect on Total Revenue: Total revenue will increase as the percentage decrease in demand is less than the percentage increase in price.
- Demand Curve: Illustrate this with a demand curve that reflects the inelastic demand.