1.

The marginal rate of substitution can be calculated as under-

COMBINATION UNITS OF UNITS OF COMBINATION CHANGE CHANGE MRS Y,X

COMMODITY COMMODITY OF Y AND X IN Y (∆Y) IN X(∆) (∆Y/∆X)
Y X
A 40 10 40+10 - - -
B 25 14 25+14 -15 4 -3.75
C 17 19 17+19 -8 5 -1.6
D 10 27 10+27 -7 8 -0.87
E 7 38 7+38 -3 11 -0.27

The Marginal Rate of Substitution (MRS) is defined as the rate at which a consumer
is ready to exchange a number of units of good X for another unit of good Y keeping
the level of satisfaction same. The MRS of two substitute goods X and Y can be
defined as the quantity of good X required to replace one unit of good Y as such that
the satisfaction derived from either of the combinations remain the same.

MRSx,y derived from the different combinations of good X and Y given in the above
table can be interpreted as follows:
As the consumer moves from combination A to B on IC, he sacrifices 15 units of
good Y and gets 4 units of good X. Therefore, MRSy,x = -3.75
Similarly when the consumer moves from combination B to C, he sacrifices 8 units of
good Y and gets 5 units of good X. Therefore, MRSy,x = -1.6
This shows that as the consumer moves down the IC from combination A to B to C to
D to E, MRS diminishes from -3.75 to -1.6 to -0.87 to -0.27.

2. The different factors that can impact the demand and supply of their products in the
market can be individually explained below-

Factors affecting the demand of the product are-

a. Price of the commodity- Usually viewed as the most important factor that
affects demand. Products have different sensitivity to changes in price. For
example, demand for necessities such as bread, eggs and butter does not tend
to change significantly when prices move up or down.
b. Income of the consumer- The demand for goods depends upon the incomes
of the people. The greater income means the greater purchasing power.
Therefore, when incomes of the people increase, they can afford to buy more.
It is because of this reason that increase in income has a positive effect on the
demand for a good.
c. Size of the consumers- The market demand for a good is obtained by adding
up the individual demands of the present as well as prospective consumers of a
good at various possible prices. The greater the number of consumers of a
good, the greater the market demand for it.
 d. Taste and Preferences of the Consumer- An important factor which
determines the demand for a good is the tastes and preferences of the
consumers for it. A good for which consumer’s tastes and preferences are
greater. The changes in demand for various goods occur due to the changes in
fashion and also due to the pressure of advertisements by the manufacturers
and sellers of different products.
e. Climatic factors- The demand of the goods also depends on the climatic
conditions of a region such as hot, humid, cold or dry.

Factors affecting the supply of the product are-

a. Price of the good- The price of the good is the main factor that influences the supply
of a product. Unlike demand, there is a direct relationship between the price of a
product and its supply. If the price of a product increases, then the supply of the
product also increases and vice versa.
b. Natural Conditions- It implies that climatic conditions directly affect the supply of
certain products. Natural calamities like flood, drought and cyclone reduce the supply
of a commodity. If natural disasters are absent, production and supply of a good will
increase.
c. Taxation Policy- The production of the commodity is discouraged if heavy tax on its
production is imposed. On the contrary, tax concessions encourage producers to
increase supply.
d. The price of factors of operations- With the rise in the price of factors of production
the cost of production rises. This result in decrease of supply and vice versa.
e. Transportation- Goods transport and communication facilitates free and quick
mobility of factors of production to the producing centres and the final products to the
market. Presence of good means of transport and communication thus increases the
supply of a good and vice versa.

3. (a) Using Arc Elasticity Method-

Given,

∆Q Change in quantity (Q1-Q) = -150

∆P is change in price (P1-P) = 20

Q is original quantity demanded = 400

Q1 is the new quantity demanded = 250

P is the original price = 100

P1 is the new price = 120

 ∆Q 𝑃+𝑃1
Ep= ∆P X 𝑄+𝑄1

−150 220
= X 650
20

= -2.53

Therefore, price elasticity = -2.53

(b) Using Percentage method-

Given,

Q is original quantity demanded = 400

Q1 is the new quantity demanded = 250

P is the original price = 100

P1 is the new price = 120

(𝑄1−𝑄) (𝑃1−𝑃)
Ep = ÷
𝑄 𝑃

(250−400) (120−100)
= ÷
400 100

= - 1.85

Therefore, price elasticity = -1.85