Eco 201 Online Quiz and Discussion (Budget constraint and others)—-6/3/2023

NAME: ENYI FAVOUR ONYIYECHI
REG NO.: 2020/242586
DEPARTMENT: ECONOMICS
EMAIL: favourenyi9@gmail.com

A) Briefly discuss the indifference curve(including its assumptions and criticisms)
An indifference curve (IC) is a graphical representation of different combinations or consumption bundles of two goods or commodities, providing equal levels of satisfaction and utility for the consumer. In other words, a consumer is considered indifferent between any two bundles indicated by a point on the curve, provided these combinations give the same utility.
The indifference curve in economics examines demand patterns for commodity combinations, budget constraints and helps understand customer preferences. It is a downward sloping convex line connecting the quantity of one good consumed with the amount of another good consumed.
ASSUMPTIONS
1. The consumer acts rationally so as to maximize satisfaction.
2. There are two goods X and Y.
3. The prices of the two goods are given.
4. The consumer possess complete information about prices of goods in the market.
5. The consumer’s taste, habit and income remains the same throughout the analysis.
CRITICISMS
1. The consumer is not rational as the indifference curve assumes the consumer is very calculative and make rational decision. This is rather too much to expect of the consumer who has to act under various social, economic and legal constraints.
2. The indifference curve technique is based on the unrealistic assumptions of perfect competition whereas in reality the consumer is faced monopolistic competition.
3. Indifference curve are hypothetical because they are not subject to direct measurement.
4. Consumers don’t always possess full knowledge of the prices of goods in the market.
5. It fails to consider other factors concerning consumer behaviour as their taste and habit can’t remain the same.

B. Write short note on Budget constraint and utility maximization
BUDGET CONSTRAINT
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you. For example, if you are a sales professional with a $100 budget for promotional items, this sets the upper limit on items you can purchase. The cost of each item and the minimum quantity you need would determine how many you can buy within your budget.
When calculating budget constraints, you normally have a number of things under consideration for which you are trying to budget. However, it’s easier to understand how budget constraints work if you just consider two sets of items. You could spend your entire budget on item one, or you could spend it all on item two. Alternatively, you could buy a combination of some of item one and some of item two. The proportions of each item you purchase would be constrained by your budget.If a consumer purchases two goods, the budget limitation can be displayed with the help of a budget line on a graph. A budget line reveals all the possibilities in combinations of two goods a consumer can purchase with limited income. It allows the consumer to buy within a given budget, i.e., within their current income.

UTILITY MAXIMISATION
Utility maximisation refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions. For example, when deciding how to spend a fixed some, individuals will purchase the combination of goods/services that give the most satisfaction. Utility maximisation can also refer to other decisions – for example, the optimal number of hours for labour to supply their labour. Working more increases income, but reduces leisure time.
A consumer will consume a good up to the point where the marginal utility is greater than or equal to the price. If you feel a sandwich gives you more utility than the cost of buying then you will continue to buy.
Another way of explaining utility maximisation is through the use of indifference curves and budget lines
a. Indifference curves show different combinations of goods which gave the same utility.
b. A budge line shows disposable income and the maximum potential goods that can be bought
c. Indifference curves further to the right are more desirable as they have bigger combinations of goods.
d. Utility will be maximised at the furthest indifference curve still affordable.

C) Extensively discuss the Cobweb theory.
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices. In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

COBWEB THEORY AND PRICE DIVERGENCE
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point). If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.

COBWEB THEORY AND PRICE CONVERGENCE
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium.

ASSUMPTIONS OF COBWEB THEORY
1. In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term). If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
2. A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year. If supply is reduced, then this will cause the price to rise.
3. Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand).

LIMITATIONS OF COBWEB THEORY
1. Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world.
2. Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.
3. It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

1. Indifference curve is a diagram showing the combination of two goods that yield equal satisfaction. It is said that the higher the Indifference curve, the higher the utility derived.
Assumptions of Indifference curve include:
a. It assumes that the consumer is rational.
b. Existence of only two goods ie Good X and Good Y.
c. Tastes, income and habits of consumers are constant.
d. Perfect knowledge about market situations.
e. The goods are divisible.
Criticisms of Indifference Curve include:
a. Consumer is not rational.
b. There are many goods not only Good X and Good Y.
c. The tastes, habits and income of consumers are not constant.
d. Perfect competition and homogeneity of goods is not practical.
e. Some goods are not divisible into smaller units eg cars.

2. Budget constraint refers to anything that limits one’s spending. It refers to the total amount of items you can afford within a current budget. Budget set refers to bundles of good that exhaust the consumer’s income or that is below the consumers income.
Utility maximisation means making economic decisions that guarantee the highest level of consumer satisfaction (benefit). Utility is maximized when total outlays equal the budget available and when the price are equal for all goods and services a consumer consumes ie MUx = Px.

3. The concept of Cobweb model was initiated by Nicholas Kaldor in 1934. This theory is extensively used to analyse changes in prices and output of agricultural products. In this model, supply adjusts itself to changing conditions of demand which are manifested through price changes in previous periods and not present periods. There are basically two major causes of cobweb applications and they are:
a. Divergent views.
b. Convergent views.

NAME:OKPARAALUU DOMINION CHUKWUMAIFE
DEPARTMENT:ECONOMICS
REG NO:2020/245657
DATE:7 -3-2023
ASSIGNMENT: *Briefly discuss the indifference curve(including its assumption and criticisms).
* Write short note on budget constraint and utility maximisation.
* ​Extensively discuss the cobweb theory.
1.INDIFERENCE CURVE:Indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to consumer thereby making them indifferent. Every point on the indifference curve shows that an individual or consumer is indifferent between the two products as it gives him the same kind of utility.
ASSUMPTIONS OF INDIFFERENCE CURVE
1.The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
2.The consumer is expected to buy any of the two commodities in a combination.
3.Consumers can rank a combination of commodities based on their satisfaction levels.
usually, the combination with the higher satisfaction level is preferred.
4.The consumer behaviour remains constant in the analysis.
5.The utility is expressed in term of ordinal numbers.
6.Assumes a marginal rate of substitution to diminish.
CRITICISMS:
1.unrealistic assumptions: It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.
2.Does not provide behaviouristic explanation of consumer behaviour:The indiference map is hypothetical in nature and it is not based on observed market behaviour.it is subjective in nature instead of objective.
3.Fails to explain risky choice: Indiference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectations.
4.Absurb and unrealistic combinations:
Indifference curve analysis is based on the hypothetical combinations. When we consider different combinations of two goods , then there may be some combination that are meaningless and cannot be possible in real life.
5.Based on weak ordering:Indifference curve analysis is based on the weak ordering hypothesis i.e…, a consumer can be indifferent between a large number of combinations.
2a.THE BUDGET CONSTRAINT: This is the boundary of the opportunity set, all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income. Opportunity cost measures cost in terms of what must be given up in exchange.
2b.THE UTILITY MAXIMIZATION:Utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions.
​3.COBWEB THEORY
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
​ASSUMPTIONS OF COBWEB THEORY.
​*In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term).
​ *A key determinant of supply will be the price from the previous year.
*A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
​ *Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand.
​In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.
​ *Cobweb theory and price divergence.
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point). This is when cobweb theory is in “increasing volatility”,
If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.
​ *Cobweb theory and price convergence when the cobweb theory is in “decreasing volatility”
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium
​LIMITATIONS OF COBWEB THEORY
1.Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.
2.Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

3.It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

4.Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

5.Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

Possible examples of Cobweb theory
​*Housing
Housing is very inelastic and subject to booms and bust. In response to the housing boom in Ireland, supply increased. But, the price collapsed, leading to a big fall in the building of new housing. Tamari, (1981) argued there was evidence of cobweb nature of the Israeli housing market.

NAME:OKPARAALUU DOMINION CHUKWUMAIFE
DEPARTMENT:ECONOMICS
REG NO:2020/245657
DATE: 7-3-2023
ASSIGNMENT: *Briefly discuss the indifference curve(including its assumption and criticisms).
* Write short note on budget constraint and utility maximisation.
* ​Extensively discuss the cobweb theory.
1.INDIFERENCE CURVE:Indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to consumer thereby making them indifferent. Every point on the indifference curve shows that an individual or consumer is indifferent between the two products as it gives him the same kind of utility.
ASSUMPTIONS OF INDIFFERENCE CURVE
*The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
*The consumer is expected to buy any of the two commodities in a combination.
*consumer can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
*The consumer behaviour remains constant in the analysis.
*The utility is expressed in terms of ordinal numbers.
*Assumes marginal rate of substitution to diminish.
CRITICISMS:
1.Unrealistic.
2.No novelty.
3.Indifference curve is non-transitive.
4.Fails to explain risky choices.
5.Absurb and unrealistic combinations.
6.Based on weak ordering.
7.Does not provide behaviouristic explanation of consumer behaviour.
2a.THE BUDGET CONSTRAINT: This is the boundary of the opportunity set, all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income. Opportunity cost measures cost in terms of what must be given up in exchange.
2b.THE UTILITY MAXIMIZATION:Utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions.
​3.COBWEB THEORY
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
​ASSUMPTIONS OF COBWEB THEORY.
​*In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term).
​*A key determinant of supply will be the price from the previous year.
​*A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
​*Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand.
​In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.
​*Cobweb theory and price divergence.
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point). This is when cobweb theory is in “increasing volatility”,
If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.
​*Cobweb theory and price convergence when the cobweb theory is in “decreasing volatility”
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium
​LIMITATIONS OF COBWEB THEORY
1.Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.
2.Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

3.It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

4.Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

5.Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

Possible examples of Cobweb theory
​*Housing
Housing is very inelastic and subject to booms and bust. In response to the housing boom in Ireland, supply increased. But, the price collapsed, leading to a big fall in the building of new housing. Tamari, (1981) argued there was evidence of cobweb nature of the Israeli housing market.

NAME:OKPARAALUU DOMINION CHUKWUMAIFE
DEPARTMENT:ECONOMICS
REG NO:2020/245657
DATE: 7-3-2023
ASSIGNMENT: *Briefly discuss the indifference curve(including its assumption and criticisms).
* Write short note on budget constraint and utility maximisation.
* ​Extensively discuss the cobweb theory.
1.INDIFERENCE CURVE:Indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to consumer thereby making them indifferent. Every point on the indifference curve shows that an individual or consumer is indifferent between the two products as it gives him the same kind of utility.
ASSUMPTIONS OF INDIFFERENCE CURVE
*The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
*The consumer is expected to buy any of the two commodities in a combination.
*consumer can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
*The consumer behaviour remains constant in the analysis.
*The utility is expressed in terms of ordinal numbers.
*Assumes marginal rate of substitution to diminish.
CRITICISMS:
1.Unrealistic.
2.No novelty.
3.Indifference curve is non-transitive.
4.Fails to explain risky choices.
5.Absurb and unrealistic combinations.
6.Based on weak ordering.
7.Does not provide behaviouristic explanation of consumer behaviour.
2a.THE BUDGET CONSTRAINT: This is the boundary of the opportunity set, all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income. Opportunity cost measures cost in terms of what must be given up in exchange.
2b.THE UTILITY MAXIMIZATION:Utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions.
​3.COBWEB THEORY
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
​ASSUMPTIONS OF COBWEB THEORY.
​*In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term).
​*A key determinant of supply will be the price from the previous year.
​*A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
​*Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand.
​In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.
​*Cobweb theory and price divergence.
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point). This is when cobweb theory is in “increasing volatility”,
If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.
​*Cobweb theory and price convergence when the cobweb theory is in “decreasing volatility”
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium
​LIMITATIONS OF COBWEB THEORY
1.Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.
2.Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

3.It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

4.Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

5.Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

Possible examples of Cobweb theory
​*Housing
Housing is very inelastic and subject to booms and bust. In response to the housing boom in Ireland, supply increased. But, the price collapsed, leading to a big fall in the building of new housing. Tamari, (1981) argued there was evidence of cobweb nature of the Israeli housing market.

Name: Ekwe Okwuchukwu Cletus
Reg. No: 2020/242587
Level: 200 level
Department: Economics

1. An indifference curve is defined as the locus of points representing different combination of two goods which yield equal utility to the consumer so that the consumer is indifferent to the combinations consumed. An indifference curve is called iso-utility or equal utility curve.

Assumptions of indifference curve:
i. There are two goods X and Y;
ii. The consumer acts rationally so as to maximise satisfaction;
iii. The prices of the two goods are given;
iv. An indifference curve is always convex to the origin;
v. An indifference curve is negatively inclined, sloping downward.

Criticisms of indifference curve:
i. According to Prof. Robertson “The fact that the indifference hypothesis is more complicated of the two psychologically, happens to be more economical logically, affords no guarantee that it is nearer to the truth.”
ii. Indifference curve are hypothetical because they are not subject to direct measurement;
iii. Knight argues that the observed market behaviour of the consumer cannot be explained objectively with the help of the indifference analysis;
iv. The consumer is not rational;
v. The indifference curve fails to consider other factors concerning consumer behaviour such as speculative demand.

2.A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you. For example, if you are a sales professional with a $1,000 budget for promotional items, this sets the upper limit on items you can purchase. The cost of each item and the minimum quantity you need would determine how many you can buy within your budget. Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit.

3. The concept of Cobweb Theory was initiated by Nicholas Kaldor in 1934. This theory is extensively used to analyse changes in prices and output of agricultural products. In this model, supply adjust itself to changing conditions of demand which are manifested through price changes bed previous periods and not present period. That is to say that supply adjusts with time lag hence, the response of supply to changes in price is not instantaneous.
There are basically two major cases of Cobweb applications:
– Divergent views
– Convergent views

Divergent case
This occurs where the elasticity of supply is greater than the elasticity of demand. Here, large supply prompts reduced price for that good for the period. Then the reduced price prompts low supply in the next period and so the cycle continues until prices fall to zero.

Convergent Views
Here, the elasticity of supply is less than the elasticity of demand.

Name: Ibezim Blessing Chinyere
Reg No.: 2020/242630
Email: ibezimblessing36@gmail.com

1. Briefly discuss the indifference curve(including its assumptions and criticisms)
An indifference curve in economics is a chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied.

The indifference curve theory is based on unrealistic assumptions, such as fixed amount of money to be spent only on two goods, constant prices of those commodities, and the assumption that the consumer has not reached the point of satiety.

2. Write short note on Budget constraint and utility maximization
A budget constraint is an economic concept used to represent all the combinations of goods and services that a consumer may purchase given current prices within his/her given income. Budget constraints can be use to examine the parameters of consumer choices and maximize utility.
Utility maximization refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions. In Microeconomics, it is the problem consumer face: “How should I spend my money in order to maximize my utility?” To obtain the greatest utility, the consumer should allocate money income so that the last money spent on each good or service yields the same marginal utility.

3. Extensively discuss the Cobweb theory.
The Cobweb theory is an economic model used to explain why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand ina market where he amount produced must be chosen before prices are observed. The Cobweb theorem explains how small economic shocks can become amplified by the behavior of producers, where producers base their current output on the average price they obtain in the market during the previous year.

NAME: odumegwu happiness Oluchi.
REG NO :2020/242942
DEPT: COMBINED SOCIAL SCIENCE (economics/philosophy)
EMAIL: happinessodumegwu.242942@unn.edu.ng

What is Indifference Curve?

An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent.Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility..

Assumptions of the indifference curve

Rationality

Utility is ordinal

The diminishing marginal rate of substitution

Total utility of the consumer depends on the amount of the commodities consumed

Consistency and transitivity of choice

The goods consumed by the consumer are divisible and are substitutable to each other

An individual’s preferences are such that he prefers more to less.
Criticisms of the indifference curve
1. Unrealistic assumptions:
It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.

The purchases of a consumer arc very much affected by habits, customs and fashion. Therefore, a consumer does not act always rationally. We cannot expect a consumer to know his indifference map. Goods Visible and perfect completion is a myth.

2. No novelty:
Prof. D.H. Robertson remarked that the indifference curve technique is merely “An old wine in new bottle.”

This technique is similar to the utility analysis because it merely gave new names to old terms. The concept of utility is replaced by scale of preference, tendency of diminishing marginal utility is replaced by diminishing marginal rate of substitution and cordinal numbers such as 1, 2, 3 etc., were labelled as ordinal numbers I, II, III, etc.

3. Indifference curve is non-transitive:
Prof. W.E. Armstrong has argued that a consumer is indifferent between close alternative combinations only because he is not able to perceive the difference between the two.

But as the difference of combinations increases, the difference in the satisfaction of different combinations becomes evident and so the different combinations on the same indifference curve do not yield equal satisfaction.

Thus, if Armstrong argument is accepted different points on an indifference curve give different satisfaction. The indifference curve will become non-transitive.

4. Fails to explain risky choice:
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.

To make a choice among uncertain alternatives quantitative measurement of utility is needed to decide whether the risk is worth taking. In such situations cordinal system of utility can explain consumer bahaviour.

5. Absurd and unrealistic combinations:
Indifference curve analysis is based on hypothetical combinations. When we consider different combinations of two goods, then there may be some combinations that are meaningless and cannot be possible in real life.

6. Does not provide behaviouristic explanation of consumer behaviour:
The indifference map is hypothetical in nature and is not based on observed market behaviour. It is subjective in nature instead of objective.

The reason is that it does not set up functions and curves in purely objective terms. Purely objective indifference curves can be possible only if it is possible to obtain quantitative data.

The logical structure of indifference curve theory is such that it is difficult to quantity indifference curves. Though attempts have been made to quantity indifference curve but success is very limited.

7. Based on weak ordering:
Indifference curve analysis is based on the weak ordering hypothesis i.e., a consumer can be indifferent between a large number of combinations.
BUDGET CONSTRAINT AND UTILITY MAXIMIZATION
budget constraint refers to all possible combinations of goods that someone can afford, given the prices of goods, when all income (or time) is spent.

Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions.

Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.

In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Name: Chianumba Precious Chioma
Reg. No: 2020/242581
Department: Economics

1.The indifference curve analysis measures utility ordinally. An indifference curve shows a combinations of two goods in various quantities that provides equal satisfaction to an individual.

Assumptions of the indifference curve analysis:
i. There are two goods X and Y
ii. The price of the two goods are given.
iii. The consumer acts rationally so as to maximise satisfaction
iv. An indifference curve is always convex to the origin
v. It’s negatively inclined, sloping downward.

Criticisms of indifference curve:-
i. Midway House:-Indifference curve are hypothetical because they are not subject to direct measurement. Although consumer choices are grouped in combinations on the ordinal scale.
ii. Knight argues that the observed market behaviour of the consumer cannot be explained objectively with the help of the indifference analysis.
iii. Indifference curve are non transitive. One of the greatest critics of the indifference hypothesis is W. E Armstrong who argues that the consumer is indifferent not because he has complete knowledge of the various combinations available to him but because of his inability to judge the difference between alternative combinations.

2. Budget constraints is the total is the total amount of items you can afford within a current budget. Budget constraints illustrates range of choices available within the budget. Another term for the budget constraint is budget restriction, budget limitation.
Utility maximization is the concept that individual the organization seeks to attain the highest level of satisfaction from their economic decisions. It was first developed by utilitarian philosophers Jeremy Bentham and John staurt Mill. In macro economics, the utility maximization is the problem consumers face:-“How should I spend my money in order to maximise my utility.

3. Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which causes a cycle of rising and falling prices. In a simple Cobweb model, we assume that is an agricultural market where supply can vary due to variable factors such as weather.

Assumptions of Cobweb Theory:-
i. In an agricultural market, farmers have to decide how much to produce a year in advance before they know what the market price will be
ii. A key determinant of supply will be the price from the previous years
iii. A low price will mean some farmers go out of business
iv. Demand for agricultural goods is usually price inelastic

Limitation of Cobweb Theory:-
i. Rational expectations
ii. Price divergence is unrealistic and not empirically seen
iii. It may not be easy or desirable to switch supply
iv. Other factors affecting price
v. Buffer stock schemes

NAME: EKWEGBARA EVERESTAR CHIBUGO
REG NO: 2020/243840
DEPARTMENT: EDUCATION ECONOMICS
EMAIL: everistachi@gmail.com

INDIFFERENCE CURVE
Definition: An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility.
This curve indicates that a consumer is indifferent about the two products since he derives equal satisfaction from both.
It is an important tools while analyzing utility as they are used to represent an ordinal measure of the tastes and preferences of the consumer and to display in what way the buyer optimizes pleasure or satisfaction from his or her outlay income.

ASSUMPTIONS
1. The consumer consumes only two goods: The first and foremost assumption is that the customer has a fixed income which he wants to allocate for buying only two commodities.
2. There is the possibility of substituting one good for another but there is no perfect substitution
3. Two goods are divisible
4. The consumer must be rational: A consumer behaves logically and always look forward to maximizing his level of satisfaction.
5. The marginal rate of substitution diminishes: To acquire more units of a particular commodity, the consumer has to let go of some units of the other product. The indifference curve depends upon this principle of diminishing marginal rate of substitution.
6. Transitivity and consistency in choice: It is assumed that a consumer’s taste, choice and preference remains constant. This means if a consumer prefers X to Y and Y to Z, then he prefers X to Z.
7. Ordinal measurement of utility: Based on the consumer’s preference, the combinations of two commodities are ranked.

CRITICISM
1. Unrealistic assumptions:
It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.
2. Indifference curve is non-transitive:
a consumer is indifferent between close alternative combinations only because he is not able to perceive the difference between the two. But as the difference of combinations increases, the difference in the satisfaction of different combinations becomes evident and so the different combinations on the same indifference curve do not yield equal satisfaction.
3. Fails to explain risky choice:
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.
4. Absurd and unrealistic combinations:
Indifference curve analysis is based on hypothetical combinations. When we consider different combinations of two goods, then there may be some combinations that are meaningless and cannot be possible in real life.
5. Does not provide behaviouristic explanation of consumer behaviour:
The indifference map is hypothetical in nature and is not based on observed market behaviour. It is subjective in nature instead of objective.
6. Based on weak ordering:
Indifference curve analysis is based on the weak ordering hypothesis i.e., a consumer can be indifferent between a large number of combinations.

BUDGET CONSTRAINTS
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you.
A consumer’s budget constraint shows the possible combinations of different goods the consumer can buy given his/her income and the prices of the goods.
Changes in income and changes in prices produce changes in the budget constraint. The slope of the budget constraint equals the relative price of the two goods.

UTILITY MAXIMIZATION
Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. It is the attainment of the greatest possible total utility.

COBWEB’S THEORY
The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed.
Producers’ expectations about prices are assumed to be based on observations of previous prices.

1: An indifference curve is a chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied—hence indifferent—when it comes to having any combination between the two items that is shown along the curve.
Standard indifference curve analysis operates using a simple two-dimensional chart. Each axis represents one type of economic good. Along the indifference curve, the consumer is indifferent between any of the combinations of goods represented by points on the curve because the combination of goods on an indifference curve provides the same level of utility to the consumer.
Criticisms of the Indifference Curve
Indifference curves, like many aspects of contemporary economics, have been criticized for oversimplifying or making unrealistic assumptions about human behavior. For example, consumer preferences might change between two different points in time, rendering specific indifference curves practically useless. Other critics note that it is theoretically possible to have concave indifference curves or even circular curves that are either convex or concave to the origin at various points.

Assumptions of consumer preference theory

•Preferences are complete:The consumer has ranked all available alternative combinations of commodities in terms of the satisfaction they provide him.
Assume that there are two consumption bundles A and B each containing two commodities x and y. A consumer can unambiguously determine that one and only one of the following is the case

•Preferences are reflexive: This means that if A and B are identical in all respects the consumer will recognize this fact and be indifferent in comparing A and B
* A = B ⇒ A I B[7]

•Preferences are transitive: If A p B and B p C, then A p C.[7]
* Also if A I B and B I C, then A I C.[7]
This is a consistency assumption.

•Preferences are continuous: If A is preferred to B and C is sufficiently close to B then A is preferred to C.
A p B and C → B ⇒ A p C.
“Continuous” means infinitely divisible – just like there are infinitely many numbers between 1 and 2 all bundles are infinitely divisible. This assumption makes indifference curves continuous.

•Preferences exhibit strong monotonicity: If A has more of both x and y than B, then A is preferred to B.
This assumption is commonly called the “more is better” assumption.
An alternative version of this assumption requires that if A and B have the same quantity of one good, but A has more of the other, then A is preferred to B.

Formula for an indifference curve
 The formula used in economics for constructing an indifference curve is:
????(????, ????)=????
where:
* c stands for the utility level achieved on the curve and is constant.
* t and y are the quantities of two different goods, t and y

2: Budget Constraint
The budget constraint indicates the combinations of the two goods that can be purchased given the consumer’s income and prices of the two goods. The intercept points of the budget constraint are computing by dividing the income by the price of the good. For example, if the consumer had $8 to spend and the price of pizza was $2 and shakes were $1, then the consumer could buy four pizzas ($8/$2) or eight shakes ($8/$1). Any combination of the two goods that are on or beneath the budget constraint are affordable, while those to the outside (farther from the origin) are unaffordable.
A greater income will cause a parallel shift rightward of the budget constraint while a decrease in income will cause a parallel shift leftward.

Utlity Maximization
Given the goal of consumers is to maximize utility given their budget constraints, they seek that combination of goods that allows them to reach the highest indifference curve given their budget constraint. This occurs where the indifference curve is tangent to the budget constraint (combination A). Note that combinations B and C cost the same amount as A; however, A is on a higher indifference curve. Combination  D yields that same utility as C and B but doesn’t use all of the income, thus the consumer can increase utility by consuming more. Combination E is preferred to combination A, but is unattainable given the budget constraint.

3: Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather
Assumptions of Cobweb theory
* In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
* A key determinant of supply will be the price from the previous year.
* A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
* Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
Limitations of Cobweb theory
•Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations).
•Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.
•It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.
•Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.
•Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

1: An indifference curve is a chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied—hence indifferent—when it comes to having any combination between the two items that is shown along the curve.
Standard indifference curve analysis operates using a simple two-dimensional chart. Each axis represents one type of economic good. Along the indifference curve, the consumer is indifferent between any of the combinations of goods represented by points on the curve because the combination of goods on an indifference curve provides the same level of utility to the consumer.
Criticisms of the Indifference Curve
Indifference curves, like many aspects of contemporary economics, have been criticized for oversimplifying or making unrealistic assumptions about human behavior. For example, consumer preferences might change between two different points in time, rendering specific indifference curves practically useless. Other critics note that it is theoretically possible to have concave indifference curves or even circular curves that are either convex or concave to the origin at various points.

Assumptions of consumer preference theory

•Preferences are complete:The consumer has ranked all available alternative combinations of commodities in terms of the satisfaction they provide him.
Assume that there are two consumption bundles A and B each containing two commodities x and y. A consumer can unambiguously determine that one and only one of the following is the case

•Preferences are reflexive: This means that if A and B are identical in all respects the consumer will recognize this fact and be indifferent in comparing A and B
* A = B ⇒ A I B[7]

•Preferences are transitive: If A p B and B p C, then A p C.[7]
* Also if A I B and B I C, then A I C.[7]
This is a consistency assumption.

•Preferences are continuous: If A is preferred to B and C is sufficiently close to B then A is preferred to C.
A p B and C → B ⇒ A p C.
“Continuous” means infinitely divisible – just like there are infinitely many numbers between 1 and 2 all bundles are infinitely divisible. This assumption makes indifference curves continuous.

•Preferences exhibit strong monotonicity: If A has more of both x and y than B, then A is preferred to B.
This assumption is commonly called the “more is better” assumption.
An alternative version of this assumption requires that if A and B have the same quantity of one good, but A has more of the other, then A is preferred to B.

Formula for an indifference curve
 The formula used in economics for constructing an indifference curve is:
????(????, ????)=????
where:
* c stands for the utility level achieved on the curve and is constant.
* t and y are the quantities of two different goods, t and y

2: Budget Constraint
The budget constraint indicates the combinations of the two goods that can be purchased given the consumer’s income and prices of the two goods. The intercept points of the budget constraint are computing by dividing the income by the price of the good. For example, if the consumer had $8 to spend and the price of pizza was $2 and shakes were $1, then the consumer could buy four pizzas ($8/$2) or eight shakes ($8/$1). Any combination of the two goods that are on or beneath the budget constraint are affordable, while those to the outside (farther from the origin) are unaffordable.
A greater income will cause a parallel shift rightward of the budget constraint while a decrease in income will cause a parallel shift leftward.

Utlity Maximization
Given the goal of consumers is to maximize utility given their budget constraints, they seek that combination of goods that allows them to reach the highest indifference curve given their budget constraint. This occurs where the indifference curve is tangent to the budget constraint (combination A). Note that combinations B and C cost the same amount as A; however, A is on a higher indifference curve. Combination  D yields that same utility as C and B but doesn’t use all of the income, thus the consumer can increase utility by consuming more. Combination E is preferred to combination A, but is unattainable given the budget constraint.

3: Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather
Assumptions of Cobweb theory
* In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
* A key determinant of supply will be the price from the previous year.
* A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
* Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
Limitations of Cobweb theory
•Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations).
•Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.
•It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.
•Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.
•Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

Ugwu Maduabuchi Desmond
Business Education
2020/248205

Name; Agbo Emmanuel Chukwuemeka.
Department; Economics.
Reg no; 2020/242571.
Level; 200 level.

1) Briefly discuss the indifference curve (including it’s assumptions and criticisms).
The indifference curve analysis measures utility ordinally. An indifference curve shows a combination of two goods, say x and y in various quantities that provides equal satisfaction (utility) to an individual. A combination of indifference curves is known as indifference map.
An indifference schedule is a list of combinations of two commodities, the list being so arranged that a consumer is indifferent to the combinations, preferring none of any other.
Assumptions of Indifference curve.
1) The consumer acts rationally so as to maximize satisfaction.
2) There are 2 goods x and y.
3) The consumer possess complete knowledge of prices of goods in the market.
4) The prices of the two goods are given.
5) The consumer’s taste, habit and income remain the same throughout the analysis.
6) An indifference curve is always convex to the origin.
7) An indifference curve is negative sloping downward.
8) The consumer is in a position to order all possible combinations of the two goods.
Criticisms of Indifference curve.
1) There’s no perfect knowledge of prices of goods in any market.
2) Consumer’s taste, income or habit can change.
3) There are more than two commodities in a market.
4) Not all commodities are divisible.
5) Indifference curve fails to explain risky choice.

2a) A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you. For example, if you are a sales professional with a $1,000 budget for promotional items, this sets the upper limit on items you can purchase. The cost of each item and the minimum quantity you need would determine how many you can buy within your budget.

The same principle of budget constraint can also be applied to time. If you are a manager, your employees only have a certain number of hours in a workday, which means you need to determine how much of their time they should spend on the various things they need to accomplish. The calculation may vary from week to week as your business priorities change and your employees’ available time adjusts since some weeks include holidays or employees might take time off.

2b) What is Utility Maximization?
Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit.

Utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions.
Utility function measures the intensity to which an individual’s fulfillment is met.

3) Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.

In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Assumptions of Cobweb theory
1) In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
2) A key determinant of supply will be the price from the previous year.
3) A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
4) Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
cobweb-theory

Name: Onyebueke Peace Oluchi
Department: Economics
Reg number: 2020/242616
1. The Indifference Curve: The Indifference Curve analysis measures utility ordinally. An indifference curve shows a combination of two goods, say X and Y in various quantities that provides equal satisfaction (utility) to an individual. In economics, it is used to describe the point where individuals have no particular preference for either one good or another based on their relative quantities. A combination of indifference curves is known a indifference map. An indifference schedule is list of combination of two commodities the list being so arranged that a consumer is indifferent to the combinations, preferring none of any other.

Assumptions of Indifference Curve
– The consumer acts rationally so as to maximize
satisfaction.
– There are two goods X and Y
– The consumer possesses complete information about the prices of goods in the market.
– The prices of the two goods are given.
– The consumer taste, habits and income remain the same throughout the analysis.
– He prefers more of X to less of Y and vice versa
– An indifference curve is always convex to the origin
– An indifference curve is negatively inclined, sloping downward

Criticism of Indifference Curve
-The consumer is not Rational: The indifference analysis, like the utility theory assumes that the consumer acts rationally. He is of a calculating mind who carries innumerable combination of different commodities in his hand, can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods
– Combinations are not based in any principle: Since the combination are made irrespective of the nature of goods, they often become absurd. How many of us buy 10 pairs of shoes and 8 pants
– Limited analysis of consumers behavior: Further, the assumption that the consumer buys more units of the same good when it’s price falls is unwarranted. Leaving aside the case of inferior goods, he may not like to have more units of a good because he is under the influence of conspicuous consumption and wants to display to have variety.
– Failure to consider some other factors concerning consumer behavior.
The Indifference Curve analysis does not consider speculative demand, interdependence of the preferences of consumers in the form of snob
– Two Goods model unrealistic: Again, the two goods model on which the indifference analysis is based makes the theory unrealistic because a consumer buys not two but a large number of commodities to satisfy his innumerable wants.
– Fails to explain consumers behavior in choices involving risk or uncertainty: Another serious criticism levelled against the preferences hypothesis is that it fails to explain consumer behavior when the individual is faced with choices involving risk or uncertainty of expectations.
– Based on unrealistic assumption of perfect competition: The indifference curve technique is based on the unrealistic assumptions of perfect competition and homogenity of goods
– All commodities are not divisible: The indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units. Commodities like watches, cars, radio etc are not divisible

2.Budget Constraint: is the total amount of items you can afford within a current budget. Budget constraint illustrates the range of choices available within that budget. Budget constraint is an economic term referring to the combined amount of income available to you. For example if you a sales professional with a #1000 budget for promotional items, this sets the upper limit on item and the minimum quantity you need would determine how many you can buy within your budget.

Utility Maximization: this is also known consumer equilibrium. It is a point where a consumer derives maximum satisfaction when his or her marginal utility equates the prices of the commodity. At this point marginal utility I’d equal to zero.
Thus MUx= Price= 0
Utility Maximization is the attainment of the greatest possible total utility. While consumers would want to attain maximum utility, they are constrained by the available income and the price of the goods.

3. Cobweb theory: The cobweb theory of business cycles was propounded by 1930 independently by professors H, Schultz of America j, Tinbergen of Netherlands, who used the name Cobweb Theorem because the pattern of movement of prices and outputs resemble a cobwab.
The cobweb model is used to explain the dynamics of demand, supply and prices over long periods of time. There are many perishable agricultural commodities whose prices and outputs are determine over long periods and they show cyclical movements. As prices move up and down in cycle, quantities produced also seen to move up and down in a counter- cyclical manner. Such cycles in commodity prices and outputs are explained in terms of cobweb model.
Suppose the production process spreads over two periods, current and previous. Production in the current periodis assumed to be determined by decisions made in the previous period. Thus the current output reflect a production decision made in the previous period. This decisions is in response to the price that he expects to rule during the current period when the crop is available for sale.

Name: Amaechi Tochi Constant
Reg no: 2020/247525
Department: Combined Social Science ( Economics/ Sociology )
1. Briefly discuss the indifference curve ( including its assumption and criticism )
Definition: Indifference curve is defined as a graphical representation of different combinations or consumption bundles of two goods or commodities, providing equal levels of satisfaction and utility for the consumer. It is also defined as a download sloping convex line connecting the quantity of one good consumed with the amount of another good consumed.
In other words, a consumer is considered indifferent between any two bundles indicated by a point on the curve, provided these combinations give the same utility.

ASSUMPTIONS OF INDIFFERENCE CURVE
i. The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
ii. The consumer is expected to buy any of the two commodities in a combination.
iii. Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
iv. The consumer behavior remains constant in the analysis.
v. An indifference curve is negatively inclined sloping.
vi. He refers more of X to less of Y or more of Y to less of X.
vii. Assumes marginal rate of substitution to diminish.

ASSUMPTIONS OF INDIFFERENCE CURVE
i. Indifference curve is said to make unrealistic assumptions about human behavior.
ii. It is unable to explain risky choices undertaken by the consumer.
iii. It has been criticized for being an ‘ old wine in the new bottle’ for it has merely rehashed the concept of diminishing marginal utility of a product in new terms .
2. Write short note on
I. Budget Constraint: A budget Constraint is a constraint imposed on consumer coice by the limited budget.
A budget Constraint represents all the combination of goods and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of a budget constraint and a perference map as a tools to examine the parameters of consumer choices. Budget Constraints limit our choices as a consumer and affect our overall utility.
The budgwt Constraint represens all the possible combinatikns of two or more goods that a consumer can purchase, given current prices and their budget. Note that the budget constraint line will show all the combinations of goods you can buy given that you spend all the bidgeg you allocate for these particular goods.
And budget constraint occur as a result of scarcity and trade offs. “Scarcity” is the concept that all reasources are limited, such as time and money. Because resources are scared, people must make “trade-offs” to efficiently allocates their resources while prioritizing their most important needa and wants.
Another word for buget constraint are ” Budgetary Restriction, Budget Limitation.
FORMULAR FOR BUDGET CONSTRAINT
A budget constraint in the example with only two goods can be expressed as follows: ( P1×Q1) + ( P2×Q2 ) =M.
Where P1 is the price of the first good, P2 is the price of the second good, Q1 is the quantity of the first good, Q2 is the quantity of the second good, and M is the money available.
This equation illustrates that the quantities of goods 1 and 2 to be purchased are determined by the price and the constraints imposed by the money available.

ii. UTILITY MAXIMIZATION: This is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions.
It is an important concept in consumer theory as it shows how consumers decide to allocate their income. The utility of maximization bundle of the consumer is also not set and can change over time depending on their individual preferences of goods, price changes and increase or decrease in income.
E.g. When a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit.
Utility maximization was first developed by utilitarian philosophers “Jeremy Bentham and John Stuart Mill”, and was incorporated in economics by English economist “Alfred Marshall”.
UNDERSTANDING UTILITY MAXIMIZATION
The combination of goods or services that maximize utility is determined by comparing the marginal utility of two choices and finding the alternative with the highest total utility within the budget limit. The decision is influenced by the option that produces a higher level of satisfaction, thus explaining how companies and Individuals develop consumption habits.

3. Briefly discuss the cobweb theory

Cobweb theory is the ideas thag prices fluctuations can lead to fluctuation in supply which cause a cycle of rising and falling prices. Cobweb models explain irregular fluctuations in prices and quantities that may appear in some markets.
Assumptions of cobweb theory
i. In an agricultural markets, farmers have to decide how much to produce a year in advance-before they know what the market price will be. ( Supply is price inelastic in short term ).
ii. Demand for agricultural goods is usually price inelastic ( A fall in price only causes a smaller % increase in demand).
iii. A key determinant of supply will be the price from the previous year.

Cobweb theory and price divergence
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, ( at the equilibrium point ).

Cobweb theory and price convergence
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium.

Limitations of cobweb theory
i. Rational expectations
ii. Price divergence is unrealistic and not empirically seen.
iii. It may not be easy or desirable to switch supply.
iv. Buffer stock schemes.

Possible examples of cobweb theory
i. Housing.
ii. The pork cycle.

NAME : RAZAK RAHMAT ASABI
REG.No :2021/245346
BUSINESS EDUCATION
rahmatasabi@gmail.com

ANSWERS
1. Indifference curve

An indifference curve (IC) is a graphical representation of different combinations or consumption bundles of two goods or commodities, providing equal levels of satisfaction and utility for the consumer. In other words, a consumer is considered indifferent between any two bundles indicated by a point on the curve, provided these combinations give the same utility.
The indifference curve in economics examines demand patterns for commodity combinations, budget constraints and helps understand customer preferences. The theory applies to welfare economics and microeconomics such as consumer and producer equilibrium, measurement of consumer surplus
theory of exchange, etc.
While each axis denotes a different form of consumer goods the curve features unique combinations or consumption bundles for any two commodities in points. These combinations provide the same level of satisfaction and utility to the consumer. Since the consumer gets an equal preference for all bundles of goods, they are indifferent about any two combinations on the curve.
The slope of the curve at any given point represents utility for any combination of two goods. When it occurs, it is known as the marginal rate of substitution (MRS). It shows the consumer’s preference for one good over another only if it is equally satisfying.

ASSUMPTION OF INDIFFERENCE CURVE
The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
The consumer is expected to buy any of the two commodities in a combination.Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
The consumer behavior remains constant in the analysis. The utility is expressed in terms of ordinal numbers.
Assumes marginal rate of substitution to diminish.
Examples
Jack has 1 unit of cloth and 8 units of the book. He decides to exchange 4 units of books for an additional piece of cloth. The following situations may occur:

Jack is satisfied with 1 unit of cloth and 8 units of books.
He is also satisfied with 2 units of cloth and 4 units of books.
In conclusion, Jack has the same level of satisfaction and utility in both situations as a consumer. He can utilize the following combinations based on his choice:

Combination Cloth Books
A 1 8
B 2 4
C 3 2
D 4 1

The indifference curve analysis is indicated with a graphical representation. Where the X-axis indicates one commodity (Cloth) and Y-axis refers to another good (Book). Combinations of two goods on the curve provide Jack with the same level of satisfaction (represented by points A, B, C, D in the image).

CRITICISM OF INDIFFERENCE CURVE
1. Away from reality :
With regard to the assertion that the indifference curve technique is superior to the cardinal utility analysis because it is based on fewer assumptions, Prof. Robertson observes: “The fact that the indifference hypothesis, the more complicated of the two psychologically, happens to be more economical logically, affords no guarantee that it is nearer to the truth.” He further asks, can we ignore four- feeted animals on the ground that only two feet are needed for walking?

2. Cardinal measurement implicit in I.C technique:
Prof. Robertson further points out that the cardinal measurement of utility is implicit in the indifference hypothesis when we analyse substitutes and complements. It is assumed in their case that the consumer is capable of regarding a change in one situation to be preferable to another change in another situation. To explain it, Robertson takes three situations A, В and C, as shown in Figure I2.38. Suppose the consumer compares one change in situation AB with another change in situation
He prefers the change AB more highly than the change BC. If another point D is taken, then he prefers the change AD as highly as the change DC. This, according to Robertson, is equivalent to saying that the space AC is twice the space AD and we are back in the world of cardinal measurement of utility. Thus when changes in two situations are compared as in the case of substitutes and complements, it leads to the cardinal measurement of utility.

3.Midway House:Indifference curves are hypothetical because they are not subject to direct measurements. Although consumer choices are grouped in combinations on the ordinal scale, no operational method has been devised so far to measure the exact shape of an indifference curve. This stems from the fact that ‘the peculiar logical structure of the theory has low empiric content.’ The failure of Hicks to present a scientific approach to the consumer’s behaviour led Schumpeter to characterize the indifference analysis as a ‘midway house;’. He remarked: “From a practical standpoint we are not much better off when drawing purely imaginary indifference curves than we are when speaking of purely imaginary utility functions.”

(5) Fails to Explain the Observed Behaviour of the Consumer:
Knight argues that the observed market behaviour of the consumer cannot be explained objectively. It is a mistake not to base the analysis of consumer’s demand on the cardinal utility theory. For instance, the income and substitution effects cannot be distinguished on the basis of mere observation. In fact, what we observe is the composite price effect. Similarly, the theory of complementaries and substitutes based on the principle of marginal rate of substitution cannot be discovered from the market data. Samuelson has explained the observed behaviour of the consumer in his Revealed Preference Theory.

(6) Indifference Curves are Non-transitive:
One of the greatest critics of the indifference hypothesis is W.E. Armstrong who argues that the consumer is indifferent not because he has complete knowledge of the various combinations available to him but because of his inability to judge the difference between alternative combinations. He further opines that any two points on an indifference curve are the points of indifference not because they are of iso-utility but of zero-utility difference.

It is only when utility difference is zero that the relation between any two or more points on an indifference curve is symmetrical. Armstrong’s arguments can be explained with the help of Figure 12.39 where on I1 curve points P, Q, R and S represent different combinations of the goods X and Y. The points P and Q, R and S are so drawn that the difference between each pair is imperceptible.

clip-image

Points P and Q or R and S will be of iso-utility only if utility difference between them is zero. But the consumer cannot be indifferent between P and R because the difference of total utility between P and R is perceptible. So the consumer will prefer P to R, or R to P in the reverse case. This shows that the points on an indifference curve are not transitive.”If indifference is not transitive”, observes Armstrong, “the text book diagrams with their masses of non-intersecting indifference curves do not make sense.” Thus the very notion of ‘indifference’ appears to be of doubtful validity.

(7) The Consumer is not Rational:
The indifference analysis, like the utility theory, assumes that the consumer acts rationally. He is of a calculating mind who carries innumerable combinations of different commodities in his head, can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods. This is too much to expect of the consumer who has to act under various social, economic and legal constraints.

(8) Combinations are not based on any Principle:
Since the combinations are made irrespective of the nature of goods, they often become absurd. How many of us buy 10 pairs of shoes and 8 pants, 6 radios and 5 watches or 4 scooters and 3 cars? Such combinations do not possess any significance for the consumer.

(9) Limited Analysis of Consumer’s Behaviour:
Further, the assumption that the consumer buys more units of the same good when its price falls is unwarranted. Leaving aside the case of inferior goods, he may not like to have more units of a good because he is under the influence of “conspicuous consumption” and wants to display or to have variety. Changes in the tastes of the consumer or his indulging in speculative purchases also affects his preference for the goods. These exceptions make the indifference analysis a limited study of consumer behaviour.

(10) Failure to consider some other Factors concerning Consumer Behaviour:
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The indifference curve analysis does not consider speculative demand, interdependence of the preferences of consumers in the form of snob, Veblen and Bandwagon effects, the effects of advertising, of stocks, etc.

(11) Two-Goods Model Unrealistic:
Again, the two-goods model on which the indifference analysis is based makes the theory unrealistic because a consumer buys not two but a large number of commodities to satisfy his innumerable wants. But the difficulty is that in the case of more than three goods geometry fails and economists will have to depend upon complicated mathematical solutions for analysing the problem of consumer behaviour.

(12) Fails to Explain Consumer’s Behaviour in Choices Involving Risk or Uncertainty:
Another serious criticism levelled against the preference hypothesis is that it fails to explain consumer behaviour when the individual is faced with choices involving risk or uncertainty of expectations. If there are three situations, A, В and C, the consumer prefers A to В and С to A and out of which A is certain but the chances of occurring В or С are 50-50 . In such a situation, the consumer’s preference for С over A can only be measured quantitatively.

(13) Based on Unrealistic Assumption of Perfect Competition:
The indifference curve technique is based on the unrealistic assumptions of perfect competition and homogeneity of goods whereas, in reality, the consumer is confronted with differentiated products and monopolistic competition. Since the indifference hypothesis is based on unwarranted assumptions, it becomes unrealistic.

(14) All Commodities are not Divisible:
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The indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units. Commodities like watches, cars, radios, etc. are indivisible. To have 3½ watches or 2½ cars or 1½ radios in any combination is unrealistic. When indivisible goods are taken in a combination, they cannot be substituted without dividing them. Thus the consumer cannot get maximum satisfaction from the use of indivisible goods.

Despite these criticisms, the indifference curve technique is still regarded superior to the Marshallian introspective cardinalism.

(2)
BUDGET CONSTRAINT AND UTILITY MAXIMIZATION

Definition of Budget constraints
A budget constraint occurs when a consumer is limited in consumption patterns by a certain income.
When looking at the demand schedule we often consider effective demand. Effective demand is what people are actually able to spend given their limitations of income.
Temporary budget constraints can be overcome by borrowing, but in the long term budget constraints are determined by income such as rent and wages.
Diagram showing a budget constraint and indifference curves
Income = £40
Price of apples = £1
Price of bananas = £2

indifference-curves-three-budget-line
The budget line is B1 – this shows maximum consumption with current income.
To maximise utility, the consumer can choose on IC1, 20 apples, 10 bananas.
An increase in income would shift the budget line to the right.
UTILITY MAXIMIZATION
Given the goal of consumers to maximize utility given their budget constraints, they seek that combination of goods that allow them to reach the highest indifference curve given their budget constraint. This occurs when the indifference curve is target to the budget constraint.
Consumers face a budget constraint when choosing to maximize their utility. Given an income M and prices p1 for good x1 and p2 for good x2, the consumer can at most spend up to M for both goods:

M≥p1x1+p2x2
Since goods will always bring non-negative marginal utility, consumers will try to consume as many goods as they can. Hence, we can rewrite the budget constraint as an equality instead (since if they have more income leftover, they will use it to buy more goods).

M=p1x1+p2x2
This means that any bundle of goods (x1,x2) that consumers choose to consume will adhere to the equality above. What does this mean on our graph? Let’s examine the indifference curve plots, assuming that M=32, and p1=2 and p2=4.

0
5
10
15
0
2
4
6
8
10
Budget Constraint and Indifference Curves for the Cobb-Douglas Utility Function (alpha = 0.5)
X1
X2
The budget constraint is like a possibilities curve: moving up or down the constraint means gaining more of one good while sacrificing the other.

Let’s take a look at what this budget constraint means. Because of the budget constraint, any bundle of goods (x1,x2) that consumers ultimately decide to consume will lie on the budget constraint line. Adhering to this constraint where M=32,p1=2,p2=4, we can see that consumers will be able to achieve 2 units of utility, and can also achieve 4 units of utility. But what is the maximum amount of utility that consumers can achieve?

Notice an interesting property about indifference curves: the utility level of the indifference curves gets larger as we move up and to the right. Hence, the maximizing amount of utility in this budget constraint is the rightmost indifference curve that still touches the budget constraint line. In fact, it’ll only ‘touch’ (and not intersect) the budget constraint and be tangential to it.

(3)
COBWEB THEORY
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Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.

In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

ASSUMPTION OF COBWEB THEORY
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
cobweb-theory

If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
If supply is reduced, then this will cause the price to rise.
If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

Cobweb theory and price divergence
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point)

cobweb-increasing-volatility-price

If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.
Cobweb theory and price convergence
cobweb-theory-decreasing-volatility
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium

LIMITATION OF COBWEB THEORY
Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.
It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

Possible examples of Cobweb theory
Housing,
Housing is very inelastic and subject to booms and bust. In response to the housing boom in Ireland, supply increased. But, the price collapsed, leading to a big fall in the building of new housing. Tamari, (1981) argued there was evidence of cobweb nature of the Israeli housing market.

NAME: MUOKEBE CHIAMAKA FAITH

Reg no : 2020/244660

Dept. Education and Economics

Question 1
Briefly discuss the indifference curves (including its assumption and critisms)

Indifference Curve Definition
An indifference curve (IC) is a graphical representation of different combinations or consumption bundles of two goods or commodities, providing equal levels of satisfaction and utility for the consumer. In other words, a consumer is considered indifferent between any two bundles indicated by a point on the curve, provided these combinations give the same utility.

The indifference curve in economics examines demand patterns for commodity combinations, budget constraints and helps understand customer preferences. The theory applies to welfare economics and microeconomics, such as consumer and producer equilibrium, measurement of consumer surplus, theory of exchange, etc.

Understanding Indifference Curve

An indifference curve is a downward sloping convex line connecting the quantity of one good consumed with the amount of another good consumed. Irish-born British economist Francis Ysidro Edgeworth first proposed this two-dimensional graph, also known as the iso-utility curve.
While each axis denotes a different form of consumer goods
, the curve features unique combinations or consumption bundles for any two commodities in points. These combinations provide the same level of satisfaction and utility to the consumer. Since the consumer gets an equal preference for all bundles of goods, they are indifferent about any two combinations on the curve.
The slope of the curve at any given point represents utility for any combination of two goods. When it occurs, it is known as the marginal rate of substitution (MRS). It shows the consumer’s preference for one good over another only if it is equally satisfying.

Indifference Curve Assumptions

1.The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
2. The consumer is expected to buy any of the two commodities in a combination.
3. The consumer behavior remains constant in the analysis.
4. The utility is expressed in terms of ordinal numbers.
5. Assumes marginal rate of substitution to diminish.
6. Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.

Criticisms Regarding Indifference Curve

1. Indifference curve is said to make unrealistic assumptions about human behaviour.
2. It is unable to explain risky choices undertaken by the consumer.
3. It has been criticized for being an ‘old wine in a new bottle’ for it has merely rehashed the concept of diminishing marginal utility of a product in new terms.
4. It is based on unrealistic expectations of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference, completely negating the imperfections in the decision making process of the consumer.
5. It has been argued by some economists that a consumer is indifferent to close alternative combinations as he or she is not able to recognize and appreciate the difference between the two. But as the difference between the goods in the combination increase, the difference becomes more apparent and the same indifference curve will not yield satisfaction to the consumer.

Question 2
Write short note on budget contraint and utility maximization

UTILITY MAXIMIZATION
The Utility Maximization rule states: consumers decide to allocate their money incomes so that the last dollar spent on each product purchased yields the same amount of extra marginal utility.
The algebraic statement is that consumers will allocate income in such a way that:
MU of product A / price of A = MU of product B / Price of B = MU of product C / price of C = etc.
It is marginal utility per dollar spent that is equalized. As long as one good provides more utility per dollar than another, the consumer will buy more of that good; as more of that product is bought, its MU diminishes until the amount of MU per dollar just equals that of the other products.

What is a budget constraint?
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you. For example, if you are a sales professional with a $1,000 budget for promotional items, this sets the upper limit on items you can purchase. The cost of each item and the minimum quantity you need would determine how many you can buy within your budget.

The same principle of budget constraint can also be applied to time. If you are a manager, your employees only have a certain number of hours in a workday, which means you need to determine how much of their time they should spend on the various things they need to accomplish. The calculation may vary from week to week as your business priorities change and your employees’ available time adjusts since some weeks include holidays or employees might take time off.

Question 3
Extensively discuss the cobweb theory

Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Assumptions of Cobweb theory

In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
1. A key determinant of supply will be the price from the previous year.
2. A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
3. Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
cobweb-theory

4. If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
5. If supply is reduced, then this will cause the price to rise.
6. If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

Limitations of Cobweb theory

1. Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

2. Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

3. It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

4. Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.
5. Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

Name: Eke Joshua Okwuchukwu
Reg. Number: 2020/242585
Department: Economics
Course: Eco 201 (Microeconomic Theory)
Email: ekejoshuaokwuchukwu@gmail.com

1. Briefly discuss the indifference curve (including it’s assumptions and criticisms).

First of all, it is expedient to note that the indifference curve adopted the concept of ordinal utility.

An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent.

In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer.

2. Write short note on Budget constraint and utility maximization.

BUDGET CONSTRAINT is the total amount of items you can afford within a current budget. Budget constraint illustrates the range of choices available within that budget.
The budget constraint is the set of all the bundles a consumer can afford given that consumer’s income.

UTILITY MAXIMIZATION is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions.

3. Extensively discuss the Cobweb theory.

The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed.
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.

In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Assumptions of Cobweb theory.

• In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)

• A key determinant of supply will be the price from the previous year.

• A low price will mean some farmers go out of business.

•Also, a low price will discourage farmers from growing that crop in the next year.

• Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand).

1. THE INDIFFERENCE CURVE;
It is a graphical representation showing the combination of two goods that yields equal level of satisfaction/utility to the consumer.
It also shows the list of combinations of two goods arranged in a way that consumers have no particular preference for either one or another, based on their relative quantities. In other words, it makes the consumer indifferent.
Example of an indifference curve is a teenager who might be indifferent between owning two band tee-shirts and one novel or four novels and one band tee-shirt.
The higher the indifference curve, the higher the level of satisfaction/utility derived from combining two goods.

ASSUMPTIONS OF THE INDIFFERENCE CURVE
They include;
1. Consumers are rational (based on budget), so
as to maximize satisfaction/utility.
2. There is combination of two goods (i.e; X and
Y).
3. The prices of the two goods are stated.
4. The consumer’s tastes, habits and income
remains unchanged.
5. It is negatively sloping downwards.
6. It’s curve is always convex to origin.
7. Consumer arranges two goods in a scale of
preference.

CRITICISMS OF INDIFFERENCE CURVE
1. Ignorance towards the market behavior.
2. Ignorance towards demonstration effect.
3. Indifference towards risks and uncertainties.
4. Unrealistic assumptions.

2. BUDGET CONSTRAINT
It is the possible combination of goods that a consumer can afford.
Budget constraint is a constraint placed on consumer choice by their limited budget.
Every consumer has a limit on how much they earn, hence the limited budgets that they allocate to different goods. Limited income is the reason for budget constraint.
Budget constraint is the sole reason why consumers cannot buy everything they want and they are induced in making choices, according to their preferences between the alternatives.

UTILITY MAXIMIZATION
It is also known as consumer equilibrium. It is the point where consumer derives maximum satisfaction when marginal utility equates price of the commodity, at this point, marginal utility is equal to zero.
It is the attainment of the greatest total utility.

3. COBWEB THEORY
It is a theory that explains irregular and periodic fluctuations in prices and quantities in certain types of markets.
It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed.
Producers’ expectations about prices are assumed to be based on observations of previous prices.

onedibe Oluebube Mercy
2020/246683
business education
oluebubemercyonedibe@gmail.com

Indifference curve is a curve on a graph (the axes of which represents quantities of two commodities) linking those combinations of quantities which the consumer regards as of equal value. It also a graph showing combination of two goods that give the consumer equal satisfaction and utility. The assumption of indifference curve is the consumer is rational to maximize the satisfaction and makes a transitive or consistent choice. Indifference curve is said to make unrealistic assumptions about human behaviour.
(2). Budget constraint is the boundary of the opportunity set-all possible combinations of consumption that someone can afford given the price of goods and individual’s income.
utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions.

Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Assumptions of Cobweb theory
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)

If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
If supply is reduced, then this will cause the price to rise.
If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices

An indifference curve (IC) is a graphical representation of different combinations or consumption bundles of two goods or commodities, providing equal levels of satisfaction and utility for the consumer. In other words, a consumer is considered indifferent between any two bundles indicated by a point on the curve, provided these combinations give the same utility.

The indifference curve in economics examines demand patterns for commodity combinations, budget constraints and helps understand customer preferences. The theory applies to welfare economics and microeconomics
, such as consumer and producer equilibrium, measurement of consumer surplus
, theory of exchange, etc.

Indifference Curve Assumptions
•The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
•The consumer is expected to buy any of the two commodities in a combination.
•Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
•The consumer behavior remains constant in the analysis.
•The utility is expressed in terms of ordinal numbers.
Assumes marginal rate of substitution to diminish.

an improvement over utility analysis and it has a number of uses and merits. In spite of merits, indifference curve analysis suffers from shortcomings and these are followings:

Criticisms
1. Unrealistic assumptions:It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.The purchases of a consumer arc very much affected by habits, customs and fashion. Therefore, a consumer does not act always rationally. We cannot expect a consumer to know his indifference map. Goods Visible and perfect completion is a myth.
2. No novelty:Prof. D.H. Robertson remarked that the indifference curve technique is merelywine in new bottle.”This technique is similar to the utility analysis because it merely gave new names to old terms. The concept of utility is replaced by scale of preference, tendency of diminishing marginal utility is replaced by diminishing marginal rate of substitution and cordinal numbers such as 1, 2, 3 etc., were labelled as ordinal numbers I, II, III, etc.The conditions of equilibrium in both analysis are similar. According to utility analysis the consumer is in equilibrium when:7 Important Criticisms of Indifference Curve Analysis – Explained!
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Indifference curve technique is definitely an improvement over utility analysis and it has a number of uses and merits. In spite of merits, indifference curve analysis suffers from shortcomings and these are followings:

Criticisms
1. Unrealistic assumptions:
It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.

The purchases of a consumer arc very much affected by habits, customs and fashion. Therefore, a consumer does not act always rationally. We cannot expect a consumer to know his indifference map. Goods Visible and perfect completion is a myth.

2. No novelty:
Prof. D.H. Robertson remarked that the indifference curve technique is merely “An old wine in new bottle.”

This technique is similar to the utility analysis because it merely gave new names to old terms. The concept of utility is replaced by scale of preference, tendency of diminishing marginal utility is replaced by diminishing marginal rate of substitution and cordinal numbers such as 1, 2, 3 etc., were labelled as ordinal numbers I, II, III, etc.

The conditions of equilibrium in both analysis are similar. According to utility analysis the consumer is in equilibrium when:

MUX / MUy = Px/ Py
According to QC, equilibrium is given by:
MRSxy= Px/ Py
Where MRS xy = MUX / MUy
By substituting for MUx/ MUy MRSxy, we get
MUx/ MUy = Px / Py
Therefore, conditions of equilibrium are similar in both the techniques.But this criticism is untenable. Prof. Hicks claims, “The replacement of diminishing marginal rate of substitution is not mere translation.It is a positive change in the theory of consumer demand.” We need not measure utility in fact to know the marginal rate of substitution. The consumer is simply asked to tell how much of if he gives to take an additional unit of X.

3. Indifference curve is non-transitive:
Prof. W.E. Armstrong has argued that a consumer is indifferent between close alternative combinations only because he is not able to perceive the difference between the two.But as the difference of combinations increases, the difference in the satisfaction of different combinations becomes evident and so the different combinations on the same indifference curve do not yield equal satisfaction.Thus, if Armstrong argument is accepted different points on an indifference curve give different satisfaction. The indifference curve will become non-transitive.

4. Fails to explain risky choice:
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.To make a choice among uncertain alternatives quantitative measurement of utility is needed to decide whether the risk is worth taking. In such situations cordinal system of utility can explain consumer bahaviour.
5. Absurd and unrealistic combinations:
Indifference curve analysis is based on hypothetical combinations. When we consider different combinations of two goods, then there may be some combinations that are meaningless and cannot be possible in real life.
6. Docs not provide behaviouristic explanation of consumer behaviour:
The indifference map is hypothetical in nature and is not based on observed market behaviour. It is subjective in nature instead of objective.The reason is that it does not set up functions and curves in purely objective terms. Purely objective indifference curves can be possible only if it is possible to obtain quantitative data.The logical structure of indifference curve theory is such that it is difficult to quantity indifference curves. Though attempts have been made to quantity indifference curve but success is very limited.

7. Based on weak ordering:
Indifference curve analysis is based on the weak ordering hypothesis i.e., a consumer can be indifferent between a large number of combinations.But, according to Prof. Samulson, it is not possible to find many situations of indifference in real world. The weak ordering makes it subjective in nature.But ordinal analysis is certainly better than coordinal analysis as it is based on fewer assumptions.

N0 2
What is a budget constraint?
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you. For example, if you are a sales professional with a $1,000 budget for promotional items, this sets the upper limit on items you can purchase. The cost of each item and the minimum quantity you need would determine how many you can buy within your budget.The same principle of budget constraint can also be applied to time. If you are a manager, your employees only have a certain number of hours in a workday, which means you need to determine how much of their time they should spend on the various things they need to accomplish. The calculation may vary from week to week as your business priorities change and your employees’ available time adjusts since some weeks include holidays or employees might take time off.
What is Utility Maximization?
Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit.The concept of utility maximization was developed by the utilitarian philosophers Jeremy Bentham and John Stuart Mill. It was incorporated into economics by English economist Alfred Marshall. An assumption in classical economics is that the cost of a product that a consumer is willing to pay is an approximation of the maximum utility that they receive from the purchased good.
No 3
Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
Assumptions of Cobweb theory
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
•A key determinant of supply will be the price from the previous year.
•A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
•Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
•However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
•If supply is reduced, then this will cause the price to rise.
•If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

Cobweb theory and price divergence
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point)
If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.

NAME: SUNNY PRECIOUS OGOCHUKWU
REG NO: 2020/245604
COURSE TITLE: MICROECONOMICS 1
COURSE CODE: ECO 201
DEPARTMENT: COMBINED SOCIAL SCIENCE ( ECONOMICS AND PHILOSOPHY)

1.) INDIFFERENCE CURVE: Indifference curve shows a combination of two goods in various quantities that provides equal satisfaction (utility) to an individual. Indifference curve are heuristic device used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget.
The slope of the Indifference curve is known as the marginal rate of substitution (MRS). The MRS is the rate at which the consumer is willing to give up one goods for another.
ASSUMPTION: There is a defined indifference map showing the consumer’s scale of preference across different combinations of two goods X and Y. The consumer has a fixed money income and wants to spend it completely on the goods X and Y. The prices of the goods X and Y are fixed for the consumer.
THREE ASSUMPTION OF INDIFFERENCE CURVE
* Consumer is rational.
* Price of goods is constant.
* Consumers spend a small part of their income.
FOUR PROPERTIES OF INDIFFERENCE CURVE
* Indifference curve can never cross.
* The farther out an indifference curve lies, the higher the utility it indicates.
* Indifference curve always slope downwards.
* Indifference curve are convex.
CRITICISM
Indifference curve is said to make unrealistic assumption about human behaviours. It is unable to explain risky choices undertaken by the consumer. It has been criticized for being an “old wine in a new bottle” for it has merely rehashed the concept of diminishing marginal utility of a product in net terms.
It is theoretically possible to have concave in difference curve or even circular curves that are either convex or concave to the origin at various points.
2.) BUDGET CONSTRAINTS: Budget constraint is the boundary of the opportunity set all possible combination of consumption that someone can afford given the price of goods and the individual’s income.
A budget constraints occurs when a consumer is limited in consumption pattern by a certain income. When we are looking at demand schedule we consider effective demand.
Effective demand is what people are actually able to spend given their limitations of income.
Another term for budget constraint is budgetary restrictions.
2ii) UTILITY MAXIMIZATION: It is a strategic scheme where by individual and companies seek to achieve the highest level of satisfaction from their economic decision.
The concept utility MAXIMIZATION was developed by the utilituarian philosophers Jeremy Bentham and John stuant mill.
Utility function measures the intensity to which an individual fulfillment is met .
Economic utility deceases with the increase in the consumption of a goods and services.
3.) COBWEB THEORY: Cobweb theory is the idea that price fluctuations can lead to fluctuation to supply which cause a cycle of rising and falling price.
It surrounding the stability of market equilibrium and the connection to processes with rational expectation is assessed.
ASSUMPTION OF CEBWEB
We assume there is an agricultural market where supply can varry due to variable factors ,such as weather.

NAME: EZE JUDITH CHINONSO
REG.NO:2020/242913
DEPT:CSS(ECONOMICS/POLITICAL SCIENCE)

Budget constraint and others

Question 1.BRIEFLY DISCUSS THE INDIFFERENCE CURVE (INCLUDING ITS ASSUMPTIONS AND CRITICISM)
Indifference curve analysis measures utility ordinally.An indifference curve shows a combination of two goods,say X and Y in various quantities that provides equal satisfaction (utility) to an individual.In economics,it is describe the point where individuals have no particular preference for either one good or another based on their relative quantities.
ASSUMPTIONS OF INDIFFERENCE CURVE ANALYSIS
It retains some of assumptions of the cardinal theory, rejects others and formulates it’s own.The assumptions of the ordinal theory are as follows:
1.An indifference curve is smooth and continuous which means that the two goods are highly divisible and that levels of satisfaction also change in a continuous manner
2.The consumer arranges for two goods in a scale of preference which means that he has both preference and indifference for the goods
3.Both preference and indifference are transitive which means that if combination A is preferable to B, and B to C, then A is preferable to C.similarly, if the consumer is indifferent between combinations A and B, and B and C, then he is indifferent between A and C.This is an important assumption for making consistent choices among a large number of combinations

CRITICISM OF INDIFFERENCE CURVE ANALYSIS
1.All commodities are not Divisible: the indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units.commodities like watches, cars, radios etc are indivisible.when indivisible goods are taken in a combination, they cannot be substituted without dividing them.tThus the consumer cannot get maximum satisfaction from the use of indivisible goods
2.Two-Goods model unrealistic: Again the two-goods model on which the indifference analysis is based makes the theory unrealistic because a consumer buys not two but a large number of commodities to satisfy his innumerable wants
3.Combinations are not based on any principle: since the combinations are made irrespective of the nature of goods, they often become absurb.How many of us buy 10 pairs of shoes and 8, pants 6 radios and 5 watches, or 4 scooters and 3 cars ? such combinations do not possess any significance for the consumer

Question 2.WRITE SHORT NOTE ON BUDGET CONSTRAINT AND UTILITY MAXIMIZATION

BUDGET CONSTRAINT represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income.consumer theory uses the concepts of a budget constraint and a preference map as tools to examine the parameters of consumer choices

UTILITY MAXIMIZATION
this is also known as consumer equilibrium.it is a point where a consumer derives maximum satisfaction when his or her marginal utility equates the price of the commodity.At this point, marginal utility is equal to zero
Thus;MUx= price X=0
Utility maximization is the attainment of the greatest possible total utility.While consumers would want to attain maximum utility, they are constrained by the available income and the price of the goods

Question 3.EXTENSIVELY DISCUSS COBWEB THEORY
Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.

In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Assumptions of Cobweb theory
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
cobweb-theory

If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
If supply is reduced, then this will cause the price to rise.
If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

Cobweb theory and price divergence
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point)

cobweb-increasing-volatility-price

If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.

Cobweb theory and price convergence
cobweb-theory-decreasing-volatility

At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium

Limitations of Cobweb theory
Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

Possible examples of Cobweb theory
Housing

Housing is very inelastic and subject to booms and bust. In response to the housing boom in Ireland, supply increased. But, the price collapsed, leading to a big fall in the building of new housing. Tamari, (1981) argued there was evidence of cobweb nature of the Israeli housing market.

OZIOKO CYNTHIA NNEKA
2020/242940
CSS (ECONOMICS/SOCIOLOGY)

1. The indifference of measures utility ordinaly it explains consumer behaviour in terms of his preferences or ranking for different combinations of two goods say x and y an indifference Curve is drawn from the indifference schedule of the consumer

The assumption made are that the consumer is rational to maximize their satisfaction and makes a transitive or consistent choice.the consumer is expected to buy any of the two commodities in a combination. consumers can rank a combination of commodities based on their satisfaction levels. So therefore the consumer processes complete information about the prices of the goods in the market

the criticism of indifference Curve is said to make unrealistic assumptions about human behaviour. it is unable to explain risky choices undertaken by the consumer it has been criticized for being an ‘old wine’ in a new bottle for it has mainly rehashed the concept of diminishing marginal utility of a product in a new terms.

2. Budget constraint: A budget constraint is a boundary of the opportunity set of possible combination of consumption that someone can afford given the prices of goods and individual income, for example a consumer only have one #1000 to spend in a store to buy a coat but likes two coats each for #800, then you can only buy one between the two coats as both price is greater than #1000 so therefore it is a constraint imposed on consumer choice by their limited budget.

Utility maximisation: individuals are said to make calculated decisions when shopping, purchasing products that brings them the greatest benefit otherwise known in economic terms as maximum utility.

3. Cobweb theory: cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause of rising and falling prices. in a simple cobweb model we assume there is an agricultural market where supply can vary due to variable factors such as the weather. possible example housing;Housing is very inelastic and subject to booms and bust.in response to the housing boom in Ireland, supply increased but the price collapsed, leading to a big fall in the building of a new housing. Tamari (1981) argued there was evidence of cubweb nature of the Israeli housing market.

Onyeukwu Maclaw Okechi
202/248952
blackshadowbrl247@gmail.com

name: Nsofor Ekperebuike Leonard
reg number: 2020/242605
Department: Economics
email: nsoforekperebuikeleonard@gmail.com
Answer:

Theory of indifference curve
indifference curve is a curve that shows the combination of two commodities and their various quantities which provide equal satisfaction.
The indifference schedule shows the list of combination of commodities, multiple indifference curve show a that the curve are further away shows high satisfaction while single indifference curve focus on one commodity. They are two kinds of indifference graph which are multiple indifference curve and single indifference curve.
Assumptions
There are two goods
Consumer makes rational decisions.
An indifference curve is negative sloping
The price of the two goods are known.
The consumer prefers good X than Y or good Y than X.
Problems curve
The indifference curve can never touch the origin.
Indifference curve is convex to the origin
The curve of an indifference curve slopes down ward.
The number given to an indifference curve is arbitrary.
Indifference curve are not necessarily parallel to each other.
criticism of indifference curve
It assures that individuals make rational decision
Far from reality
It is still the same utility measurement that is repackaged
Indifference curve are non transitive
Failure to consider other factors concerning consumer behavior

Budget constraint
Budget constant occurs as a result of scarcity and trade offs.
Formula; (P1 x Q1) + (P2 x Q2) = M
P1= price of goods 1
P2= price of goods2
Q1= Quantity of goods 1
Q2= Quantity of goods 2
M = money available
An individual will have to make a list of things he/she wants in order of prior, when an individual choose to buy commodity A instead of B. The real cost of purchasing commodity A is the cost of purchasing commodity B, this is called opportunity cost.
The idea is that cost of buying an item is the cost lost from not buying something else. Alex has N500 and wants a book which is sold at N300 and noodles which is N250, if Alex buys the noodles the opportunity/real cost of the noodles will be the price of the book (N300) vice verse.
Marginal analysis: This is the comparison of choosing more or less of a product when determining which goods to buy.
Sunk cost: this are cost of previous purchases that can not be recovered e.g Alex bought a movie ticket in the past during that time he watched the movie for about 10 minutes and left. The money money used to buy the tickets is referred to as sunck cost.

Cobweb theory
This theory is the idea that fluctuation of price in the agricultural sector can lead to fluctuations of supply which will further cause price increase.
This theory is not a business cycle theorm for it relates only to the farming sector of the economy. The name cobweb theory was suggested by professor Nicholas Kalder in 1934.
Assumption
This theory is based on three assumptions which are;
Perfect competition in which each producer assumes that price will not affect the market.
Price is completely a function of the preceding periods supply.
Commodity supplied is perishable.
Division of the cobweb theory
Continuous cobweb; Here the price and output keeps fluctuating and repeating at the same level of equilibrium.
Divergent cobweb: Here the fluctuation and increase in price and output is due to the passage of time, when it is been disturbed from the equilibrium it shifts to disequilibrium.
Coverging cobweb: if and when disturbed from it’s equilibrium position has a tendency to regain it through a series of oscillations.
criticism
It is not a trade cycle theory, it is only concerned with agriculture
It assumes that output is solely controlled by price.
The theory is based upon the unsound assumption that the crop which farmer plants in 2008 depends on the ruling price in 2007.

Name: Eze Juliet Sobechukwu
Reg no: 2020/245274
Department: Economics
1. Briefly discuss the indifference curve ( including its assumptions and criticisms)
Indifference curve shows a combination of two goods, say X and Y in various quantities that provides equal satisfaction(utility) to an individual. It is used to describe the point where individuals have no particular preference for either one good or another based on their relative quantities.
Assumptions of the indifference curve
The indifference curve has the following assumptions:
1. The consumer acts rationally so as to maximize satisfaction.
2. There are two goods X and Y.
3. The consumer possesses complete information about the prices of the goods in the market.
4. The prices of two goods are given
5. The consumer’s tastes, habit, and income remain the same throughout the analysis.
6. The consumer is in a position to order all possible combinations of the two goods.
7. The consumer arranges the two goods in a scale of preference which means that he has both preference and indifference for the goods
8. The indifference curve is negatively inclined i.e slopes downward.
9. The indifference curve is always convex to the origin
10. The two goods are highly divisible.
Criticisms of the indifference curve
1. Away from reality: according to Prof. Roherton; “The fact that the indifference hypothesis is more complicated of the two psychologically happens to be more economical logically affords no guarantee that it is nearer to the truth.
2. Serious criticism levelled against the preference hypothesis is that it fails to explain consumer behavior when the individual is faced with choices involving risk or uncertainty of expectations.
3. The indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units. Commodities like watches, car, etc are indivisible because one can’t have 2½ watches.
4. The indifference curve technique is based on the unrealistic assumptions of perfect competition and homogeneity of goods whereas in reality the consumer is confronted with differentiated products and monopolistic competition.
5. Knight argues that the observed market behavior of the consumer cannot be explained objectively with the help of the indifference analysis. Since individuals think and act subjectively, it is a mistake not to base the analysis of consumer’s demand on the cardinal utility theory.

Write short note on budget constraint and utility maximization.
Budget constraint: In economics, a budget constraint refers to all possible combinations of goods that someone can afford, given the prices of goods, when all income (or time) is spent. Based on the money available each month, an individual must allocate their funds efficiently to purchase goods and services. To conceptualize this in a simple way, imagine having only two items that can be purchased with the budget: hot dogs and t-shirts. The budget can be spent entirely on hot dogs, entirely on t-shirts, or some combination of both. The quantity of either good that can be purchased is determined by the price of the good, as well as the quantity purchased, and the price of the other good. Based on the money available each month, an individual must allocate their funds efficiently to purchase goods and services.
To conceptualize this in a simple way, imagine having only two items that can be purchased with the budget: hot dogs and t-shirts. The budget can be spent entirely on hot dogs, entirely on t-shirts, or some combination of both. The quantity of either good that can be purchased is determined by the price of the good, as well as the quantity purchased, and the price of the other good.
Budget Constraint Formula: A budget constraint in the example with only two goods can be expressed as follows:
(P1 x Q1) + (P2 x Q2) = M
Utility maximization: this is also known as consumer equilibrium. It is a point where a consumer derives maximum satisfaction when his or her marginal utility equates the price of the commodity. At the point where marginal is equal to zero.
Thus; MUx = Price x = 0.
Utility maximization is the attainment of the greatest possible total utility. While consumers would want to attain maximum utility, they are constrained by the availability of income and the price of the goods.
Extensively discuss the cobweb theory:
Cobweb theory:
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
The theory is based on these assumptions;
1. Perfect competition is which each producer assumes that present prices will continue and that his own production plans will not affect the market.
2. Price is completely a function of the preceding period’s supply.
3. The commodity concerned is perishable. These assumptions show that the theory is particularly applicable to agricultural products.
Cobweb theory have been divided into; continuous cobweb, divergent cobweb and convergent cobwebs.
In continuous cobweb: the fluctuations in price and output continues repeating about equilibrium at same level.
In the case of diverging Cobweb; the amplitude of the fluctuation increases with the passage of time. Once disturbed from position of equilibrium the economy moves cumulatively away from it into the doledrums of disequilibrium.
Convergent cobwebs: In the case of converging cobweb the economy, if and when disturbed from its equilibrium position, has a tendency to regain it through a series of oscillations.
Criticisms of the cobweb theory:
1.This is not strictly a trade cycle theorem for it is concerned only with the farming sector. There are a good many others sphere of production where it says nothing.
2. This theorem assumes that the output is solely governed by price. Thus is unrealistic assumption. The fact is that the output particularly of farm products is determined not only by price, but by several other factors—weather, prices of the factors of production.
3. This theory is only applicable when; the price is governed by the supply available, when production is governed only by the considerations of price as wider perfect competition, and when production cannot vary before the expiry of one full period.

UGWUANYI AMARACHI PERPETUAL
2020/245318
ugwuanyiamaraa5@gmail.com

1. INDIFFERENCE CURVE
An indifference curve (IC) is a graphical representation of different combinations or consumption bundles of two goods or commodities, providing equal levels of satisfaction and utility for the consumer. In other words, a consumer is considered indifferent between any two bundles indicated by a point on the curve, provided these combinations give the same utility.
The indifference curve examines demand patterns for commodity combinations, budget constraints and helps understand customer preferences. The theory applies to welfare economics and microeconomics, such as consumer and producer equilibrium, measurement of consumer surplus, theory of exchange, etc.
An indifference curve is a graphical representation of various combinations or consumption bundles of two commodities. It provides equivalent satisfaction and utility levels for the consumer.
It makes the consumer indifferent to any of the combinations of goods shown as points on the curve. Also, it means the consumer cannot prefer one bundle over another on the same graph.
The marginal rate of substitution (MRS) indicates if a consumer is willing to sacrifice one good for another commodity while maintaining the same level of utility.
While each axis denotes a different form of consumer goods
, the curve features unique combinations or consumption bundles for any two commodities in points. These combinations provide the same level of satisfaction and utility to the consumer. Since the consumer gets an equal preference for all bundles of goods, they are indifferent about any two combinations on the curve.The slope of the curve at any given point represents utility for any combination of two goods. When it occurs, it is known as the marginal rate of substitution (MRS). It shows the consumer’s preference for one good over another only if it is equally satisfying.
Indifference Curve Properties
a. Downward Slope: In a curve, when the consumption of one commodity increases, the consumption of another decreases for any combination. Since it indicates a positive marginal rate of substitution (MRS), ensuring the same level of satisfaction, it leads to a negative or downward slope.
b. Strictly Convex Slope: The curve allows the substitution among two commodities in any combination. As consumption of one good over another gains less utility, the marginal rate of substitution between two goods diminishes. It is visible as a consumer moves along the curve to the right. Hence, it is strictly convex.
Satisfaction Levels Directly Proportional To Axes Levels: An indifference map is the graphical representation of a group of curves. A curve occurring to the right of an existing one indicates a higher level of consumer satisfaction. And the one on the left shows a lesser consumer satisfaction level. Similarly, the curve at a higher axis level shows greater consumer satisfaction than the curve at a lower axis level. Hence, the consumer always prefers to move upwards in the indifference map.
c. Never Intersects Each Other: The set of curves will never intersect each other. The higher level and lower level of curves show different levels of satisfaction. Hence, they do not meet at the point of intersection.
d. Never Touches X- and Y-Axes: If a curve touches the horizontal (x-axis) and the vertical (y-axis), it denotes that the assumption of the consumer purchasing two commodities in a combination could be wrong. It shows the consumer’s interest in buying only one good. Hence, the curve never touches x- and y-axes.
Indifference Curve Assumptions
a. The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
b. The consumer is expected to buy any of the two commodities in a combination.
c. Consumers can rank a combination of commodities based on their satisfaction levels. d. Usually, the combination with the higher satisfaction level is preferred.
e. The consumer behavior remains constant in the analysis.
f. The utility is expressed in terms of ordinal numbers.
g. Assumes marginal rate of substitution to diminish.

2. BUDGET CONSTRAINT AND UTILITY MAXIMIZATION
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you. It can also be defined as a representation of all the combinations of goods and services that a consumer may purchase given current prices within his or her given income.
The equation of a budget constraint is
Px + Py=m where Px is the price of good X, and Py is the price of good Y, and m = income.
Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions.
Types of Utility Maximization
a. Total Utility Maximization
Total utility refers to the total amount of satisfaction that a person obtains by consuming a specific quantity of units of a product at a given time. The greater the consumer’s total utility, the higher the measure of satisfaction acquired.The formula below is used in calculating total utility maximization:
TU = U1 + MU2 + MU3…
Where:
TU is Total Utility
U is Utility
MU is Marginal Utility
b. Marginal Utility Maximization
Marginal utility refers to the additional satisfaction that a consumer achieves from utilizing one additional item. The objective of marginal utility is to determine the quantity of a product that the consumer is willing to buy. The utility of that product declines with the consumption of each subsequent additional unit, then the consumer will stop when marginal utility reaches zero or becomes negative.

3. COBWEB THEORY
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices. The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It explains irregular fluctuations in prices and quantities that may appear in some markets.
Limitations of Cobweb theory
1. Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

2. Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

3. It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

4. Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

5. Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus.

Name:; Enechukwu Ebube Felicitas
Department;;; Economics
Reg no:;2020/242592
Course;:Eco 201
1)) Briefly discuss the in curve(including it’s assumptions and criticism)
An indifference curve is a chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied—hence indifferent—when it comes to having any combination between the two items that is shown along the curve.
Indifference curves assume that individuals have stable and ordered preferences and seek to maximize their utility. As a result, indifference curves will have these four properties:
1)The indifference curve is downward-sloping.
2)The slope of the indifference curve is convex.
3)Curves plotted higher and farther to the right correspond with higher levels of utility.
4)Various indifference curves can never cross or overlap.
Assumptions ;;
1)The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
2)The consumer is expected to buy any of the two commodities in a combination.
3)Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
4)The consumer behavior remains constant in the analysis.
5)The utility is expressed in terms of ordinal numbers.
6)Assumes marginal rate of substitution to diminish.
Criticisms::;
1)It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.
The purchases of a consumer arc very much affected by habits, customs and fashion. Therefore, a consumer does not act always rationally. We cannot expect a consumer to know his indifference map. Goods Visible and perfect completion is a myth.
2. No novelty:
Prof. D.H. Robertson remarked that the indifference curve technique is merely “An old wine in new bottle.”
This technique is similar to the utility analysis because it merely gave new names to old terms. The concept of utility is replaced by scale of preference, tendency of diminishing marginal utility is replaced by diminishing marginal rate of substitution and cordinal numbers such as 1, 2, 3 etc., were labelled as ordinal numbers I, II, III, etc.
refore, conditions of equilibrium are similar in both the techniques.
But this criticism is untenable. Prof. Hicks claims, “The replacement of diminishing marginal rate of substitution is not mere translation.
It is a positive change in the theory of consumer demand.” We need not measure utility in fact to know the marginal rate of substitution. The consumer is simply asked to tell how much of if he gives to take an additional unit of X.
3. Indifference curve is non-transitive:
Prof. W.E. Armstrong has argued that a consumer is indifferent between close alternative combinations only because he is not able to perceive the difference between the two.
But as the difference of combinations increases, the difference in the satisfaction of different combinations becomes evident and so the different combinations on the same indifference curve do not yield equal satisfaction.
Thus, if Armstrong argument is accepted different points on an indifference curve give different satisfaction. The indifference curve will become non-transitive.
4. Fails to explain risky choice:
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.
To make a choice among uncertain alternatives quantitative measurement of utility is needed to decide whether the risk is worth taking. In such situations cordinal system of utility can explain consumer bahaviour.
5. Absurd and unrealistic combinations:
Indifference curve analysis is based on hypothetical combinations. When we consider different combinations of two goods, then there may be some combinations that are meaningless and cannot be possible in real life.
6. Docs not provide behaviouristic explanation of consumer behaviour:
The indifference map is hypothetical in nature and is not based on observed market behaviour. It is subjective in nature instead of objective.
The reason is that it does not set up functions and curves in purely objective terms. Purely objective indifference curves can be possible only if it is possible to obtain quantitative data.

2)) Write short note on budget constraints and utility maximization.
A budget constraint occurs when a consumer is limited in consumption patterns by a certain income.
When looking at the demand schedule we often consider effective demand. Effective demand is what people are actually able to spend given their limitations of income.
Temporary budget constraints can be overcome by borrowing, but in the long term budget constraints are determined by income such as rent and wages.
Utility Maximization
Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit.
Utility Maximization
The concept of utility maximization was developed by the utilitarian philosophers Jeremy Bentham and John Stuart Mill. It was incorporated into economics by English economist Alfred Marshall. An assumption in classical economics is that the cost of a product that a consumer is willing to pay is an approximation of the maximum utility that they receive from the purchased goods.

3))) Extensively discuss the cobweb theory
The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers’ expectations about prices are assumed to be based on observations of previous prices.
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
Assumptions of Cobweb theory:;
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Limitations of Cobweb theory;;
1)Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.
2)Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.
It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

Ubochioma Favour Ugomma
2018/245392
princessfavluv@gmail.com

QUESTION 1

BRIEFLY DISCUSS THE INDIFFERENCE CURVE (INCLUDING IT’S ASSUMPTIONS AND CRITICISMS)
An indifference curve shows the combination of products that give the same satisfaction to a consumer.Thus, a consumer is indifferent between the combinations indicated by any two points on one indifference curve. A set of indifference curves is called an INDIFFERENCE MAP.

SHAPES OF AN INDIFFERENCE CURVE
Any taste pattern can be illustrated with indifference curves. How does the indifference curve work?
1. When we have perfect substitute: For goods that are perfect substitute the consumer will be willing to substitute one type of good for the other at a rate of one for one.
2. Perfect complements: Here one good is of no use without the other. There is no rate at which any consumer will substitute one good for the other when she starts with equal number of each.
3. Goods with zero utility: When a good gives more satisfaction a person will be unwilling to sacrifice even the smallest amount of other goods to obtain any quantity of the good in question.
4. Goods with absolute necessity: Here the marginal rate of substitution for an absolute necessity approaches infinity as consumption falls towards the amount that is absolutely necessary.
5. Goods that confers a negative utility after some level of consumption: Beyond some points,for the consumption of some products will reduce satisfaction.This gives a positive indifference curve slope when utility is reduced by further consumption.
ASSUMPTIONS OF AN INDIFFERENCE CURVE
1. It assumes that consumers act rationally to maximize satisfaction.
2. It assumes that there are two goods X and Y.
3. It assumes that the consumers possesses complete information of the prices of the goods in the market .
4. It assumes that the prices of the two goods are given.
5. It assumes that the consumer prefers more of X to less of Y, and less of X to more of Y.
6. It assumes that an indifference curve is negatively inclined sloping downward.
7. It assumes that an indifference curve is always convex to the origin.
8. It assumes that the consumers tastes habits and income remained the same throughout the analysis.
9. It assumes that an indifference curve is smooth and continuous which means that the two groups are divisible and the levels of satisfaction also change in a continuous manner.
10. It assumes that consumers arrange is the two goods in a scale of preference which means that he has both preference and indifference for the goods.
PROPERTIES OF AN INDIFFERENCE CURVE.
1. An indifference curve to the right of another represent a higher level of satisfaction when you combine two goods.
2. The slope is negative and downward-sloping.
3. The slope is also known as marginal rate of substitution (MRS)
4. Indifference curve can never touch or intercept.
5. It cannot touch either axis (X or Y)
6. Indifference curve is convex to the origin.
CRITICISMS OF AN INDIFFERENCE CURVE.
1. According to professor Robertson, the indifference curve technique is simply “Old wine in new bottles” because it substitutes the concept of preference for utility.
2. It is away from reality i.e it is unrealistic.
3. It fails to explain the observed behaviour of the consumer.
4. Indifference curves and non-transitive. Meaning that consumers are indifferent not because they have complete knowledge of the various combinations available to them but because of their inability to judge the difference between alternative combinations.
5. Consumers are not rational.
6. Combinations of good and not based on any principle.
7. Limited analysis of consumers behaviour. The assumption that consumers buy more units of the same good when its price falls is unwarranted.
8. It fails to explain consumers behaviour in choices involving risk or uncertainty.
9. It is based on unrealistic assumption of perfect competition.
10. All commodities and not divisible into small units.
USES OR APPLICATION OF INDIFFERENCE CURVES.
The indifference curve helps us in solving different problems.
1. The problem of exchange
2. Effects of subsidy on consumers.
3.The problem of rationing.
4. Index numbers :measuring cost of living.
5. Income leisure trade-off and supply of labour.

QUESTION TWO

WRITE SHORT NOTE ON BUDGET CONSTRAINTS AND UTILITY MAXIMISATION.
WHAT IS A BUDGET?
A budget is the financial expression of a consumers or an organization’s operating plan for a period of time.
The purpose of budgeting is to provide a forecast of revenues and expenditures which enables actual financial operation of the consumer to be measured against the forecast and it establishes the cost constraint.
WHAT IS BUDGET CONSTRAINT?
A budget constraint is a condition that constrains one’s expenditure to income (for a person), all the value of imports to exports (for a country), all the value of revenue to expenditure (for a firm). It is the total amount of items one can afford within a current budget. The concept of budget constraint in economics revolves around the idea that a given consumer is limited in consumption relative to the amount of capital they possess.consumers theory uses the concept of a budget constraint and a preferred map to analyse consumer choices.
The line that indicates the possible bundles the consumer can buy when spending all his income is called BUDGET LINE. The slope of the budget line is also called ECONOMIC RATE OF SUBSTITUTION (ERS). The slope of the budget line also represents the opportunity cost of consuming more of good A because it describes how much of good B the consumer has to give up to consume one or more units of good A.
UTILITY MAXIMIZATION
WHAT IS UTILITY?
Utility can be defined as the ones satisfying power of a good or service, the satisfaction or pleasure one gets from consuming a service. It is subjective as it varies from one person to another.
WHAT IS MAXIMIZATION?
maximization can be defined as the process of finding the maximum value of a function. It is an act of raising something to its greatest value or extent.
WHAT IS UTILITY MAXIMIZATION?
utility maximization can be defined as the concept that consumers and businesses seek to maximize their satisfaction from their purchases. Consumers nor businesses choose options which would provide a lower level of satisfaction over another option.utility maximisation is also a point where consumers or businesses make the optimal point where any further consumption will create a negative impact on utility.
UTILITY MAXIMIZATION RULE.
The utility maximization rule states that “to obtain the greatest utility a consumer should allocate money income so that the last money spent on each good or service we will use the same marginal utility”.
Utility is maximized when price is equal to marginal utility.the problem is that there are too many groups in the market that the consumer can spend on however utility is only maximized when there is no other good that represent a utility value that is equal or greater than a goods price. IMPORTANCE OF UTILITY MAXIMISATION.
utility maximisation is important because it helps economics to understand how and why consumers allocate their income in a certain way.
ASSUMPTIONS OF UTILITY MAXIMISATION.
1. It assumes that consumers are rational.
2. It assumes that consumer incomes are limited because resources are limited.
3. It assumes that consumers have clear preference is for various goods and services.
4. It assumes that every item has a price tag.
LIMITATIONS OF UTILITY MAXIMISATION.
1. Rational behaviour: Consumers are not always rational, they sometimes make rash and impulsive purchases that do not provide the anticipated utility they wanted.
2. Preferences are unknown: How a consumer will accurately measure how much satisfaction they will receive from choosing good A to B is unknown assuming he has not tried either good.
3. Ordinal utility: This refers to the inability of humans to accurately state the amount of utility they receive from a good.
ROLE OF BUDGET CONSTRAINT IN UTILITY MAXIMISATION.
Income and budget prevent consumers from maximizing their utility. Example,
A consumer might value and be willing to pay up to #5 for their first bag of chips, yet they are sold for #2.for every additional bag of chips sold the consumer’s willingness to pay drops (this might not be until after 20 bags). This is where the role of budget comes in. If the consumer only has #20, they can only buy 10 bags of chips, which is below the level of which utility will be maximized.

QUESTION THREE.

EXTENSIVELY DISCUSS THE COBWEB THEORY.
A cobweb theory can be defined as a theory in economics that defines the subjective fluctiations of price in the market.it explains the fact that changes in price leads to fluctuations in supply and further causes a cycle of rising and falling price.
In 1930, cobweb theory was advanced by three economists in Italy. They are, Henery Schultz if USA,Althus Hanav of Italy and Jam Tinbergen of Netherlands. The term cobweb theory was first suggested by professor Nicholas kaldor in 1934. It was named cobweb theory because the patterns traced by the prices and output movement resembled a cobweb. The theory is based on LAG concept which asserts that supply adjusts itself to changing conditions of demand which are manifested through price changes not instantaneously but after a certain period. the time taken by the supply to adjust itself to changes in demand is known as LAG.
Thus,the quantity supplied during any given time period is the function of the prize-giving in the earlier time. While they demand depends on the price that prevails in the period itself.recovery theory is applied mainly in the case of agricultural products who supply can be increased or decreased with setting time lag. Most crops can be down and reaped once in a year.
ASSUMPTIONS OF THE COBWEB THEORY.
The assumptions showed that the theory is more applicable to agricultural products.
1. There is perfect competition where each producer assumes that present prices will continue and that is production plan will not affect the market.
2. Price is completely a function of the preceding period supply.
3. The commodity concerned is perishable.
Since the supply in farming is slow to adjust itself to changes in demand and, violent fluctuations in prices and outputs are most likely to occur. For instance, an increase in demand will at once result in a spiral rise in price, since in the short period there can be no increase in supply. This high price may make farmers increase their outputs to a greater degree than is justified by the increase in demand.Consequently, when this increased supply comes to the market, there will be a sharp fall in price which may then result in a reduction in output in the next period to a greater extent again than is justified. The result is that violent changes in output succeed price longer in farm products.
Professor Tinbergen has extended the application of Cobweb’s analysis to durable goods the supply of which responds to demand changes after a significant time-lag because on account of long “gestation period”, there is a considerable lag between the decision to produce and the actual deliveries of the durable goods.
DIVISION OF COBWEB THEORY
1. Continuous cobweb.
2. Divergent cobweb.
3. Convergent cobweb.
CONTINUOUS COBWEB: This is a situation where the fluctuations in price and output continues repeating about equilibrium at the same level.
When the elasticity of supply is equal to the elasticity of demand a series of reactions works out. The quantity in a initial, period (Q1) is large, producing a relatively low price where it intersects the demand curve at P1. This low price, intersecting the supply curve calls forth in the next period a relatively short supply Q2 .This short supply gives a high price, P2 where it intersects the supply curve. This high price calls forth a corresponding increased production Q3, in the third, with a corresponding low price, P3. Since this low price in the third period is identical with that in the first, the production and price in the fourth, fifth, and subsequent periods will continue to rotate around the path Q2, P2, Q3, P3 etc.
As long as price is completely determined by the current supply, and supply is completely determined by the preceding price, fluctuation in price and production will continue in this unchanging pattern indefinitely, without an equilibrium being approached or reached. This is true in this particular case because, the demand curve is the exact reverse of the supply curve so that at their overlap each has the same elasticity.
DIVERGENT COBWEB: This is a situation whereby the flunctuation increases with the passage of time. Once this is disturbed the economy moves into a state of disequilibrium.
When the elasticity of supply is greater than the elasticity of demand, the series of reactions take place. Starting with the moderately large supply, Q1 and the corresponding price P1, the series of reactions can be traced.In the second period, there is a moderately reduced supply, Q2, with the corresponding higher price, P2 . This high price calls forth a considerable increase in supply, Q3 in the third period, with a resulting material reduction in price, to P3.
This is followed by a sharp reduction in quantity produced in the next period to Q4, with a corresponding very high price, P4. This fifth period sees a still greater expansion in supply to Q5 etc. Under these conditions the situation might continue to grow more and more unstable, until price falls to absolute zero, or production is completely abandoned, or a limit was reached to available resources (where the elasticity of supply would change) so that production could no longer expand.
CONVERGENT COBWEB: Here, when there is a disturbance in the economic position of equilibrium, it has a tendency to regain it through series of oscillations (a regular periodic from tuition in value).this narrowing down of the fluctuations occur when the slope of the supply curve is steeper than the slope of the demand curve.
This is a reverse situation, with supply less elastic than demand. Starting with a large supply and low price in the first period, P1 would be a very short supply and high price, Q2, and P2, in the second period.Production would expand again in the third period to Q3 but to a smaller production than that in the first period. This would set a moderately low price, P3, in the third period, with a moderate reduction to Q4 in the fourth period; and a moderately high price P4. Continuing through Q9, P6 and Q6, and P6, production and price approach more and more closely to the equilibrium condition where further changes would occur. Of the three case considered thus far, only this one behaves in the manner assumed by equilibrium theory ; and even it converges rapidly. If the supply curve is less elastic than the demand curve.
The cobweb theory of trade cycle represents an important forward step in the development of the Dynamics of cyclic fluctuations. Earlier approaches to the study of the cycle problem were static in character and treated the economy as of a point in time completely ignoring the movement of the economy through Time. This was to the extent that the adjustment between supply and demand we assumed to take place instantqneously and not with a certain degree of time lag.
CRITICISMS OF COBWEB THEORY.
1. It is not strictly a trade cycle theory as it is concerned only with the farming sector but there are many other spheres of production where it says nothing.
2. It assumes that the output is solely governed by price. This is unrealistic as output especially of farm products is not only determined by price but by several other factors like prices of factors of production, weather e.t.c.
3. It is only applicable where prices governed by available supply,when production is governed only by the price considerations and when production cannot very before the expiry of one food period.
4. The theory is based on the unsound assumption that the crop which the farmer plants in the year 2001 depends on the prices ruling in the year 2000.
5. We can see that in this theory disequilibrium occurs and we will find that dis-equilibrium once it begins will continue indefinitely. Once equilibrium is upset, the system falls into a series of unending cycles.
CONCLUSION
There are setbacks in the cobweb theory i.e the cobweb theory is important besides its application as an explanation for the cyclic behaviour of products and other agricultural products market. It’s concentration is on the fact that present event depends on the past happenings if it moves with a technique of demonstrating the process of change over time.

REFERENCES
https://staffwww.fullcoll.edu/fchan/micro/3utility_maximization_model.htm
http://www2.harpercollege.edu/mhealy/eco211/lectures/utilmax/util.htm
https://boycewire.com/utility-maximization-definition/
https://www.indeed.com/career-advice/career-development/budget-constraint
https://homework.study.com/explanation/discuss-the-cobweb-theory-explain-and-give-examples.html
https://www.economicsdiscussion.net/trade-cycle/cobweb-theory-of-trade-cycle/21632

NAME: IZUCHUKWU CHIDIMMA MARYJANE.
REG NO: 2020/242685.
DEPARTMENT: SOCIAL SCIENCE EDUCATION.
UNIT: EDUCATION ECONOMICS.
EMAIL: faustian2sure@gmail.com.
COURSE: MICRO ECONOMICS THEORY 1.

QUESTION 1:DISCUSS THE INDIFFERENCE CURVE (INCLUDING ITS ASSUMPTIONS AND CRITICISMS).
ANS: Indifference curve is a curve that shows the level of satisfaction attained by a consumer from the consumption of two commodities. Indifference curve is downward sloping from left to right and is convex to the origin.
ASSUMPTIONS OF AN INDIFFERENCE CURVE.
a) There are two commodities X and Y.
b) The consumer possesses complete information about the goods in the market.
c) The consumers tastes,habits and income remain the same throughout the analysis.
d) The consumers acts rationally so as to maximize satisfaction.
e) An indifference curve is smooth and continuous which means that the two goods are highly divisible.
CRITICISMS OF AN INDIFFERENCE CURVE.
a) There are different goods a consumer can select from.
b) The consumer cannot possess complete information about the goods in the market because of his/her inability to judge the difference between alternative combinations.
c) The consumers taste,habits and income varies and therefore cannot remain the Same throughout the analysis.
d) The consumers are not rational.
e) Some goods are not divisible in nature,goods like car,watches and radio can’t be divisible into smaller unit.

QUESTION 2: WRITE SHORT NOTE ON BUDGET CONSTRAINTS AND UTILITY MAXIMIZATION.
BUDGET CONSTRAINTS: Is the boundary of the opportunity set, that is all possible combination (good X1,X2) of consumption that someone can afford within the amount of income available to a consumer. It is also known as budget set. OR Budget constraints is the combination of good X1 and X2 that is less or equal to your money income.
UTILITY MAXIMIZATION: Is the attainment of the greatest possible total utility that is the point where a consumer derives utmost satisfaction from consuming a product.

QUESTION 3: EXTENSIVELY DISCUSS THE COBWEB THEORY.
Cobweb theory also known as cobweb model is an economics theory that explains why prices might be subject to periodic fluctuations in certain types of Market. It describes the cyclical supply and demand in a market where the amount produced must be chosen before prices are observed.
SOME LIMITATIONS OF COBWEB THEORY.
a) Prices divergence is unrealistic and not empirically seen.
b) It may not be easy or desirable to switch supply.
c) Other factors affecting prices.
d) Rational expectations.
e) Buffer stock schemes.

NAME: Ezechinwoye Fredrick Nmesoma
REG NO: 2020/242614
DEPARTMENT: ECONOMICS
GMAIl: Manwudikefred@gmail.com
BRIEFLY DISCUSS THE INDIFFERENCE CURVE (INCLUDING ITS ASSUMPTIONS AND CRITICISMS)
An indifference curve is a curve that shows the combination of two goods, say X and Y in various quanti that provides equal satisfaction to an individual. In economics, it is used to desct the point where individuals have no particular preference for either one good or another based on their relative quantities.
ASSUMPTIONS OF THE INDIFFERENCE CURVE ANALYSIS
1 The consumer acts rationally as to maximise satisfaction.
2 There are two goods X and Y
3 The consumer possesses complete information about the price of goods in the market
4 He prefers more of X and less of Y or more of Y and less of X
5 The prices of the two goods are given
6 The consumer’s tastes, habits and income remains the same throughout the analysis
7 An indifference curve is always convex to the origin
8 An indifference curve is negatively inclined, sloping downwards.
9 An indifference curve is smooth and continuous which means that the two goods are highly divisible and that levels of satisfaction also change in a continuous manner
10 The consumer arranges the two goods I’m a scale of preference which means that he has both ‘preference’ and ‘indifference’ for the goods
11 Bother preference and indifference are transitive which means that if combination A is preferable to B, and B to C, then a is.preferable to C. Similarly if the consumer is indifferent between combinations A and B and B and C, then he is indifferent between A and C. This is an important yassumption for making consistent choices among a large number of combinations
12 The consumer is in a position to order, all possible combination of the two goods
CRITICISM OF THE INDIFFERENCE CURVE ANALYSIS
1. Fails to explain risky choice:
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.
To make a choice among uncertain alternatives quantitative measurement of utility is needed to decide whether the risk is worth taking. In such situations cordinal system of utility can explain consumer bahaviour.
2. No novelty:
Prof. D.H. Robertson remarked that the indifference curve technique is merely “An old wine in new bottle.”
This technique is similar to the utility analysis because it merely gave new names to old terms. The concept of utility is replaced by scale of preference, tendency of diminishing marginal utility is replaced by diminishing marginal rate of substitution and cordinal numbers such as 1, 2, 3 etc., were labelled as ordinal numbers I, II, III, etc.
3. Indifference curve is non-transitive:
Prof. W.E. Armstrong has argued that a consumer is indifferent between close alternative combinations only because he is not able to perceive the difference between the two.
But as the difference of combinations increases, the difference in the satisfaction of different combinations becomes evident and so the different combinations on the same indifference curve do not yield equal satisfaction.
4. Unrealistic assumptions:
It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.
The purchases of a consumer arc very much affected by habits, customs and fashion. Therefore, a consumer does not act always rationally. We cannot expect a consumer to know his indifference map. Goods Visible and perfect completion is a myth.
5. Absurd and unrealistic combinations:
Indifference curve analysis is based on hypothetical combinations. When we consider different combinations of two goods, then there may be some combinations that are meaningless and cannot be possible in real life.
6. Docs not provide behaviouristic explanation of consumer behaviour:
The indifference map is hypothetical in nature and is not based on observed market behaviour. It is subjective in nature instead of objective.
The reason is that it does not set up functions and curves in purely objective terms. Purely objective indifference curves can be possible only if it is possible to obtain quantitative data.
The logical structure of indifference curve theory is such that it is difficult to quantity indifference curves. Though attempts have been made to quantity indifference curve but success is very limited.
7. Based on weak ordering:
Indifference curve analysis is based on the weak ordering hypothesis i.e., a consumer can be indifferent between a large number of combinations.
But, according to Prof. Samulson, it is not possible to find many situations of indifference in real world. The weak ordering makes it subjective in nature.
But ordinal analysis is certainly better than coordinal analysis as it is based on fewer assumptions.

BUDGET CONSTRIANT
A budget constraints represents all the combination of goods and services that a consumer may purchase given current prices within his or her given income.
It can be said to be the total amount of items you afford within a current budget. Budget constraints illustrates the range of choices avaiy within that budget.
Budget constraint occurs when a consumer is limited in con consumption pattern by a certain income.

UTILITY MAXIMIZATION
Utility maximization is also known as consumer equilibrium. It is a point where a consumer derives maximum satisfaction when his or her marginal utility equates the price of the commodity. At this point marginal utility is equal to zero.
Utility maximization can also be said to be the attainment of the greatest possible total utility.

COBWEB THEORY
COBWEB THEORY is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers expectations about prices are assumed to be based on observations of previous prices
ASSUMPTIONS OF THE COBWEB THEORY
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand).
LIMITATIONS OF THE COBWEB THEOR
Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors

Name:ANI CHISOM PROMISE
Reg no:2020/242569
Department:Economics.
INDIFFERENCE CURVE:Is a graph showing combination of two goods that have same level of satisfaction to an individual.it is downward sloping.Indifference curve is for ranking of utility.The higher the indifference curve, the higher the ranking(I.e the higher the satisfaction the consumer drive from consuming two goods).Indifference curve can never touch or intercept.
Assumption:
* The consumer places the two goods in a scale of preference.
*Indifference is transitive.
*The price of the two goods are given.
*The consumer acts rationally to maximize satisfaction.
*The consumer poses complete information for goods and services.
CRITICISM:
*The consumer is not rational:One of the analysis in the aspect of utility theory,assuming that consumers acts rationally,but this is too much to expect of the consumer who has to act under various combination of goods .
*Indifference curve are non-transitive
*Combination are not based on any principle.
*Bases on unrealistic assumption of perfect competition..

BUDGET CONSTRAINT:It is the total amount of items you can afford within a current budget.it represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income.
UTILITY MAXIMIZATION :
Utility maximization is the concept under consumer theory that show how consumers decide to allocate their income.the highest satisfaction from their economic decisions .
COBWEB THEORY:Cobweb theory is an economic model which extensively explain why prices might be subject to periodic fluctuations in certain types of markets is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices

Name : Charles ThankGod Ekenedilichukwu
Reg no : 2020/242137
Dept : Business education
Faculty : VTE

An indifference curve shows a combination of two goods in various quantities that provides equal satisfaction (utility) to an individual. It is used in economics to describe the point where individuals have no particular preference for either one good or another based on their relative quantities.
An indifference curve is a graphical representation of various combinations or consumption bundles of two commodities. It provides equivalent satisfaction and utility levels for the consumer.

Indifference Curve Assumptions
(1)The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
(2)The consumer is expected to buy any of the two commodities in a combination.
Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
(3)The consumer behavior remains constant in the analysis.
(4)The utility is expressed in terms of ordinal numbers.
Assumes marginal rate of substitution to diminish.

Criticisms of indifference curve :
(1) Fails to explain risky choice – indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation
(2) Unrealistic combinations ; When we consider different combinations of two goods , then there may be some combination that are meaningless and cannot be possible in real life.
(3) Unrealistic assumptions ; it’s based on the unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference. This means that a consumer does not act always rationally.

A budget constraint — is an economic term referring to the combined amount of items you can afford within the amount of income available to you. For example, if you are a sales professional with a #1,000 budget for promotional items, this sets the upper limit on items you can purchase. The cost of each item and the minimum quantity you need would determine how many you can buy within your budget.

Utility maximisation is a strategy whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit.
The combination of goods or services that maximize utility is determined by comparing the marginal utility of two choices and finding the alternative with the highest total utility within the budget limit. The decision is influenced by the option that produces a higher level of satisfaction. This explains how companies and individuals develop consumption habits.

Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
Assumptions of Cobweb theory
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
Agricultural markets are a context where the cobweb model might apply . Suppose for example that as a result of unexpectedly bad weather, farmers go to market with an unusually small crop of strawberries. This shortage, equivalent to a leftward shift in the market’s supply curve, results in high prices. If farmers expect these high price conditions to continue, then in the following year, they will raise their production of strawberries relative to other crops. Therefore, when they go to market the supply will be high, resulting in low prices. If they then expect low prices to continue, they will decrease their production of strawberries for the next year, resulting in high prices again.

Name: Orji David Kenechukwu
Department: Economics
Reg. no : 2020/242635
level: 200level

(1). The indifference curve analysis measures utility ordinally. An indifference curve shows a combination of two goods say X and Y in various quantities that provide equal satisfaction (utility) to an individual.

Assumptions of the indifference curve analysis.
(1). The consumer acts rationally so as to maximize satisfaction.
(2). There are two goods X and Y
(3). The consumer possesses complete information about the prices of goods in the market.
(4). The prices of the two goods are given
(5). The consumer’s tastes, habits and income remain the same throughout the analysis.

Criticism of the indifference curve analysis
(1). The consumer’s tastes, habits and income cannot always remain the same .
(2). The consumer cannot posses complete information about the prices of goods in the market
(3). There cannot be only two goods in the market

(2). Budget constraint occurs when a consumer is limited in consumption pattern by a certain income . It represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income.

Utility maximization refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions. For example when deciding how to spend a fixed some, individuals will purchase the combination of goods or services that give the most satisfaction.

(3). Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
Assumptions of cobweb theory
(1). In a agricultural market farmers have to decide how much to produce a year in advance before they know what the market price will be.
(2). A key determinant of supply will be the price from previous year.
(3). A low price will mean some farmers go out of business. Also a low price will discourage farmers from growing that crop in the next year.
(4). Demand for agricultural goods is usually price inelastic ( a fall in price only causes smaller % increase in demand )
Cobweb theory and price divergence
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve. if the slope of the supply curve is less than the demand curve then the price changes could become magnified and the market more unstable.

Cobweb theory and price convergence
At the equilibrium point, if the demand curve is more elastic than the supple curve we get the price volatility falling and the price will converge in the equilibrium.

Limitations of cobweb theory
(1). Rational expectation
(2). Price divergence is unrealistic and not empirically seen.
(3). it may not be easy or desirable to switch supply.

Mordi Chidera Reginald
2020/242598
Economics major

Indifference Curve: a graph representing all consumption opportunities that a consumer holds as equal value. That means he is better off in each combination he chooses.
Assumptions of the indifference curve are:
Consumer is rational
There are two commodities
The consumer has perfect information about the prices of goods in the market.
price of the two goods is given.
Goods are arranged in order of preference that is the consumer has preference and indifference for the two commodities
preference and indifference are transitive
The price of goods is constant;
The higher IC curve gives the highest satisfaction and the lowest curve gives the lowest satisfaction
Two IC curves never intersect each other
Consumers spend a small part of their income.
Criticisms of the indifference curve are;
Old Wine in New Bottles.
Away from Reality.
Fails to Explain the Observed Behaviour of the Consumer.
Indifference Curves are Non-transitive.
The Consumer is not Rational.
Two-Goods Model Unrealistic.
Budget constraint
In economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income.
Utility maximisation
This is a concept in economics. Utility maximisation is the behaviour of the consumer to attain
maximum satisfaction from spending his money income on goods and services.
utility-maximizing rule
To obtain the greatest utility the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility as thus;
MUx/Px = MUy/Py = MUz/Pz
A discussion on Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices. In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
Assumptions of Cobweb theory
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in the short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand).
Cobweb theory and price divergence
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point). If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.
Cobweb theory and price convergence
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium.
Limitations of Cobweb theory
Rational expectations:The model assumes farmers base next year’s supply purely on the previous price and assume that next year’s price will be the same as last year’s (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or a ‘bad year and learn from price volatility.

Price divergence is unrealistic and not empirically seen:The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt price changes.

It may not be easy or desirable to switch supply:A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

Other factors affecting price:There are many other factors affecting price than a farmer’s decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

Buffer stock schemes: Governments or producers could band together to limit price volatility by buying surplus.
In conclusion, above I’ve been able to discuss an indifference curve, its assumptions, its criticisms, budget constraints, utility maximisation, and a discussion on cobweb theory.

Name : Attamah Juliet chinaza
Reg no: 2020/24992 Department:Economic major
Date. :12 March 2023

Indifference Curve
An indifference curve is a downward sloping convex line connecting the quantity of one good consumed with the amount of another good consumed. Irish-born British economist Francis Ysidro Edgeworth first proposed this two-dimensional graph, also known as the iso-utility curve.

While each axis denotes a different form of consumer goods
, the curve features unique combinations or consumption bundles for any two commodities in points. These combinations provide the same level of satisfaction and utility to the consumer. Since the consumer gets an equal preference for all bundles of goods, they are indifferent about any two combinations on the curve.

The slope of the curve at any given point represents utility for any combination of two goods. When it occurs, it is known as the marginal rate of substitution (MRS). It shows the consumer’s preference for one good over another only if it is equally satisfying.

Indifference Curve Properties
1.Downward Slope: In a curve, when the consumption of one commodity increases, the consumption of another decreases for any combination. Since it indicates a positive marginal rate of substitution (MRS), ensuring the same level of satisfaction, it leads to a negative or downward slope.
2.Strictly Convex Slope: The curve allows the substitution among two commodities in any combination. As consumption of one good over another gains less utility, the marginal rate of substitution between two goods diminishes. It is visible as a consumer moves along the curve to the right. Hence, it is strictly convex.
3. Satisfaction Levels Directly Proportional To Axes Levels: An indifference map is the graphical representation of a group of curves. A curve occurring to the right of an existing one indicates a higher level of consumer satisfaction. And the one on the left shows a lesser consumer satisfaction level. Similarly, the curve at a higher axis level shows greater consumer satisfaction than the curve at a lower axis level. Hence, the consumer always prefers to move upwards in the indifference map.
4. Never Intersects Each Other: The set of curves will never intersect each other. The higher level and lower level of curves show different levels of satisfaction. Hence, they do not meet at the point of intersection.
5. Never Touches X- and Y-Axes: If a curve touches the horizontal (x-axis) and the vertical (y-axis), it denotes that the assumption of the consumer purchasing two commodities in a combination could be wrong. It shows the consumer’s interest in buying only one good. Hence, the curve never touches x- and y-axes.

Indifference Curve Assumptions
1.The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
2.The consumer is expected to buy any of the two commodities in a combination.
3.Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
4.The consumer behavior remains constant in the analysis.
5.The utility is expressed in terms of ordinal numbers.
6.Assumes marginal rate of substitution to diminish.
utility maximization
In utility maximization, consumers strive to spend money in ways that provide the greatest amount of resources and satisfaction for the least cost. Learn about budget constraints and consumer choices in the context of utility maximization, review utility as it pertains to consumers, and understand why consumers care about this and the impact if they ignore it.
Budget Constraint
Budget Constraint shows what the consumer can afford. Most people would like to increase the quantity and quality of goods they consume.but households consumption choices are limited by the households income and by the prices of the goods and services available. The constraint to a households consumption choices are described by the budget constraint or budget line.
Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.

In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Assumptions of Cobweb theory
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
cobweb-theory

If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
If supply is reduced, then this will cause the price to rise.
If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

Cobweb theory and price divergence
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point)

cobweb-increasing-volatility-price

If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.

Cobweb theory and price convergence
cobweb-theory-decreasing-volatility

At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium

Limitations of Cobweb theory
1.Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

2. Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

3. Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus.

1.Indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them different. This measures utility ordinally. It explains consumer behaviour in terms of his preferences or rankings for different combinations of two groups, say X and Y. This is drawn from the indifference schedule of the consumer.
It’s assumptions are:
a. Consumer acts rationally
b. there’s complete satisfaction about the prices of the goods
c. The consumers tastes, habits, and income remains the same
d. it’s always convex to it’s origin
e. It is negatively inclined sloping
f. There are only two goods X and Y
It’s criticism:
a. They are hypothetical because they are not subjected to direct measurements
b. The consumer is not rational
c. Combinations are not based on any principle
d. Limited analysis of consumer’s behaviour
e. It substitutes the concept of preference for utility
f. The observed market cannot be explained objectively

2. Budget constraint is the boundary of the opportunity set for all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income. This occurs when a consumer is limited in consumption patterns by a certain income. Budget constraint temporary and long term, temporary budget constraint can be overcome by borrowing while the long term are determined by income such as rent and wages.
Utility maximisation is the making economic decisions that guarantee the highest level of consumer satisfaction. It is the concept that individual and firms seek to get the highest satisfaction from their economic decisions for example consumer A faces an option of two chocolate bars that both cost $1 . However he only have $1 to spend, one chocolate bar is the consumers favourite but they would like to try something new. Their utility is maximised when they choose the option which provides them greatest utility for the value paid.

3. Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which causes a cycle of rising and falling prices. In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors such as the weather. This theory attempts to explain the regularly recurring cycles in the output and prices of farm products. This is not a business cycle theory for it relates only to the farming sector of the economy. In 1930, this theory was advanced by three economist in Italy. The term cobweb theory was first suggested by professor Nicholas Kaldor in 1934.

Omeje Deborah Mmesoma
Economics
2020/242625
1. Indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them different. This measures utility ordinally. It explains consumer behaviour in terms of his preferences or rankings for different combinations of two groups, say X and Y. This is drawn from the indifference schedule of the consumer.
It’s assumptions are:
a. Consumer acts rationally
b. there’s complete satisfaction about the prices of the goods
c. The consumers tastes, habits, and income remains the same
d. it’s always convex to it’s origin
e. It is negatively inclined sloping
f. There are only two goods X and Y
It’s criticism:
a. They are hypothetical because they are not subjected to direct measurements
b. The consumer is not rational
c. Combinations are not based on any principle
d. Limited analysis of consumer’s behaviour
e. It substitutes the concept of preference for utility
f. The observed market cannot be explained objectively
2. Budget constraint is the boundary of the opportunity set for all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income. This occurs when a consumer is limited in consumption patterns by a certain income. Budget constraint temporary and long term, temporary budget constraint can be overcome by borrowing while the long term are determined by income such as rent and wages.
Utility maximisation is the making economic decisions that guarantee the highest level of consumer satisfaction. It is the concept that individual and firms seek to get the highest satisfaction from their economic decisions for example consumer A faces an option of two chocolate bars that both cost $1 . However he only have $1 to spend, one chocolate bar is the consumers favourite but they would like to try something new. Their utility is maximised when they choose the option which provides them greatest utility for the value paid.
3. Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which causes a cycle of rising and falling prices. In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors such as the weather. This theory attempts to explain the regularly recurring cycles in the output and prices of farm products. This is not a business cycle theory for it relates only to the farming sector of the economy. it was advanced in 1930 by three economists in Italy. the term cobweb theorywas first suggested by professor Nicholas Kaldor in 1934

Name: Nnaji Chinaza Edith
Reg. number: 2020/245658
Department: Economics
Email address: chinazaedith320@gmail.com

Questions:
(1) Briefly discuss the indifference curve (including its assumptions and criticisms)
(2) Write short note on Budget constraint and utility maximization
(3) Extensively discuss the Cobweb theory.

Answers:
(1) An indifference curve, in economics, connects points on a graph, representing different quantities of two goods, points between which a consumer is indifferent. That is, any combinations of two products indicated by the curve will provide the consumer that has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer.

The assumptions are:
a) There is the possibility of substituting one good for another but there is no perfect substitution.
b) Two goods are divisible.
c) The consumer must be rational.
d) Transitivity and consistency in choice.
e) Ordinal measure of utility.

2a) Budget constraint: In economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. Consumer theory uses the concepts of budget constraint and a preference map as tolls to examine the parameters of consumer choices. Both concepts have a ready graphical representation in the two-good case. The consumer can only purchase as much as their income will allow, hence they are constrained by their budget.

2b) Utility maximization: This was first developed by utilitarian philosophers Jeremy Bentham and John Stuart Mill. In microeconomics, the utility maximization is the problem consumers face?. “How is the problem consumers face?” It is an important concept in consumer theory as it shows how consumers decide to allocate their income. Because consumers are rational, they seek to extract the most beneficial for themselves. The utility maximization bundle of the consumer is not also set and can change over time depending on their individual preferences of goods, price changes and increases or decreases in income.

3) The cobweb theorem: This is an economics model used to explain how small economics shocks can be explained by the behaviors of producers. the amplification is, essentially, the result of information failure, where the producers base their current output on the average price they obtain in the market during the previous year. This is, to some extent, a non-rational decision, given that a supply side shock between planting and harvesting (such as unexpectedly good or bad harvest) can lead to unexpectedly lower or higher price.

1). An indifference curve is a curve that represents all the combinations of goods that gives the same satisfaction..
*it’s assumption is based on the fact that the consumer is rational to maximize the satisfaction and make a transitive or consistent choice.
* it also states that each point in the indifference curve shows that a consumer is indifferent towards the two products as each of them gives the same utility.
*it assumes that the utility can only be expressed ordinals..
* it’s criticism are:the fact that it makes unrealistic assumptions about human behaviour.
* it makes absurd and unrealistic combination.
2). Budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you.it also helps one to understand how to allocate a fixed budget across the consumption of two or more goods..it occurs as a result of scarcity and trade offs.
it’s formula is equated as follows:(P1 x Q1)+(p2 X Q2)=m.
Utility maximization: This is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decision..it also means making decisions that guarantee the highest level of consumer satisfaction.. when a consumer is maximizing utility,the ratio of marginal utility to price is the same for all goods.
3).Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which causes a cycle of rising and falling prices.
it is also based on the assumption that there is an agricultural market where supply can vary due to variable factors such as the weather.
Cobweb models explain irregular fluctuations in prices and quantities that may appear in some markets. The key issue in these models is time, since the way in which expectations of prices adapt determines the fluctuations in quantity and prices..it concentrates attention on the important fact that the present events depends upon the past happenings.

Name: Ifeakandu Sylvia Ukaamaka
Reg. No: 2020/246142
Dept. Economics

1. An indifference curve shows a combination of 2 goods in various quantities that provide equal satisfaction to an individual.
Assumptions
1) the consumer acts rationally so as to maximise satisfaction.
2) there are 2 goods involved
3) consumer posseses complete information about the prices of goods in the market.
4) prices of the 2 goods are given

Criticism
1) indifference curves are non- transitive
2) the consumer is not rational: indifference analysis assumes that the consumer acts rationally.
3) the Indifference curve analysis fail to consider other factors concerning consumer behavior such as speculative demand etc.

2. The budget constraint is the boundary of the opportunity set—all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income.

The concept of utility maximization is key in consumer theory because it helps economic experts understand how market participants allocate their resources. Utility maximization models assume that consumers are rational decision-makers seeking the highest level of benefit from goods or services. Individuals and organizations make economic decisions that guarantee the highest degree of fulfillment (pleasure, happiness, or satisfaction).

Maximizing utility is a strategic decision-making process. For example, organizations need an effective strategic plan when making purchases to guarantee maximum benefit despite limited resources
Another importance of utility maximization is avoiding sunk costs. Economics and finance experts define sunk costs as lost investments that cannot be recuperated because they have already been incurred. Examples include:

Salaries and benefits
Marketing and research
Facility expenses
Installation of new equipment or software
Economists agree that sunk costs incur no utility and cannot be recovered, hence the phrase, “do not cry over spilled milk.” As such, these costs are not considered when making consumption, investment, or other economic decisions.

Limitations of Utility Maximization
Despite the importance of maximizing utility, there are notable limitations. The following are the limitations of utility maximization:

3.
Extensively discuss the Cobweb theory.

Cobweb theory has played an essential role incorporating both features as explanations for endogeneity of price and production cycles in commodity markets. Empirical testing of cobweb models explored the possibility ‘short run’ supply and demand elasticities could produce temporary market instability.
Cobweb theory is the idea that price fluctuation can lead to fluctuations in supply which cause a cycle of raising and falling prices. In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors,such as the weather.
WEAKNESSES OF COBWEB THEORY1.It assumes that products (former) are irrational and hence base their production decisionon the previous prices without thinking of price changes but this is rather unrealisticbecause in reality farmers always think about changes in prices in the future.

1) Briefly discuss the indifference curve(including its assumptions and criticisms)

In Economics, an Indifference Curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. In other words, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve.

The assumptions of Indifferent Curve; the ordinal theory are the following:

(1) The consumer acts rationally so as to maximise satisfaction.
(2) There are two goods X and Y
(3) The consumer possesses complete information about the prices of the goods in the market.
(4) The prices of the two goods are given.
(5) The consumer’s tastes, habits and income remain the same throughout the analysis.
(6) He prefers more of X to less of Y or more of Y to less of X.
(7) An indifference curve is negatively inclined sloping downward.
(8) An indifference curve is always convex to the origin.
(9) An indifference curve is smooth and continuous which means that the two goods are highly divisible and that level of satisfaction also change in a continuous manner.
(10) The consumer arranges the two goods in a scale of preference which means that he has both ‘preference’ and ‘indifference’ for the goods. He is supposed to rank them in his order of preference and can state if he prefers one combination to the other or is indifferent between them.
(11) Both preference and indifference are transitive. It means that if combination A is preferable to B, and В to C, then A is preferable to C. Similarly, if the consumer is indifferent between combinations A and B, and В and C, then he is indifferent between A and C. This is an important assumption for making consistent choices among a large number of combinations.
(12) The consumer is in a position to order all possible combinations of the two goods.

Criticism of Indifferent Curve

Indifference curves inherit the criticisms directed at utility more generally.

Herbert Hovenkamp (1991)has argued that the presence of an endowment effect has significant implications for law and economics, particularly in regard to welfare economics. He argues that the presence of an endowment effect indicates that a person has no indifference curve (see however Hanemann, 1994) rendering the neoclassical tools of welfare analysis useless, concluding that courts should instead use WTA as a measure of value.
Fischel (1995) however, raises the counterpoint that using WTA as a measure of value would deter the development of a nation’s infrastructure and economic growth.
Austrian economist Murray Rothbard criticised the indifference curve as “never by definition exhibited in action, in actual exchanges, and is therefore unknowable and objectively meaningless.”

2) Write short note on Budget constraint and utility maximization

In economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income. The budget constraint is the first piece of the utility maximization framework—or how consumers get the most value out of their money—and it describes all of the combinations of goods and services that the consumer can afford. In reality, there are many goods and services to choose from, but economists limit the discussion to two goods at a time for graphical simplicity. Allingham, Michael (1987).

Utility maximization was first developed by utilitarian philosophers Jeremy Bentham and John Stuart Mill. In microeconomics, the utility maximization problem is the problem consumers face: “How should I spend my money in order to maximize my utility?” Utility maximization is an important concept in consumer theory as it shows how consumers decide to allocate their income. Because consumers are rational, they seek to extract the most benefit for themselves. However, due to bounded rationality and other biases, consumers sometimes pick bundles that do not necessarily maximize their utility.

3) Extensively discuss the Cobweb theory.

The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed.

The cobweb model( theory) can have two types of outcomes:

If the supply curve is steeper than the demand curve, then the fluctuations decrease in magnitude with each cycle, so a plot of the prices and quantities over time would look like an inward spiral, as shown in the first diagram. This is called the stable or convergent case.

If the demand curve is steeper than the supply curve, then the fluctuations increase in magnitude with each cycle, so that prices and quantities spiral outwards. This is called the unstable or divergent case.

Two other possibilities of cobweb theory are:

Fluctuations may also maintain a constant magnitude, so a plot of the outcomes would produce a simple rectangle. This happens in the linear case if the supply and demand curves have exactly the same slope (in absolute value).

If the supply curve is less steep than the demand curve near the point where the two curves cross, but more steep when we move sufficiently far away, then prices and quantities will spiral away from the equilibrium price but will not diverge indefinitely; instead, they may converge to a limit cycle.

Reference

Allingham, Michael (1987). Wealth Constraint,
The New Palgrave: A Dictionary of
Economics, doi:10.1057/978-1-349-95121-
5_1886-1
Hovenkamp, Herbert (1991). “Legal Policy and
the Endowment Effect”. The Journal of
Legal Studies. 20 (2): 225.
doi:10.1086/467886. S2CID 155051169.
Hanemann, W. Michael (1991). “Willingness To
Pay and Willingness To Accept: How Much
Can They Differ? Reply”. American
Economic Review. 81 (3): 635–647.
doi:10.1257/000282803321455449. JSTOR
2006525.
Fischel, William A. (1995). “The offer/ask
disparity and just compensation for
takings: A constitutional choice
perspective”. International Review of Law
and Economics. 15 (2): 187–203.
doi:10.1016/0144-8188(94)00005-F.
Rothbard, Murray (1998). The Ethics of Liberty.
New York University Press. p. 242. ISBN
9780814775592.

Name: ORJI UZOAMAKA .J.
Registration number: 2020/242612
Economics department
Email: orjiuzoamaka2019@gmail.com

Answers:
Number 1………..
An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent.Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility.
It is used in economics to describe the point where individuals have no particular preference for either one good or another based on their relative quantities.
Along the curve, a consumer thus has an equal preference for the various combinations of goods shown.
Typically, indifference curves are shown convex to the origin, and no two indifference curves ever intersect.
Standard indifference curve analysis operates using a simple two-dimensional chart. Each axis represents one type of economic good. Along the indifference curve, the consumer is indifferent between any of the combinations of goods represented by points on the curve because the combination of goods on an indifference curve provides the same level of utility to the consumer.Indifference Curve Assumptions
The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice. The consumer is expected to buy any of the two commodities in a combination. Consumers can rank a combination of commodities based on their satisfaction levels.
Indifference Curve Assumptions:
The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice. The consumer is expected to buy any of the two commodities in a combination. Consumers can rank a combination of commodities based on their satisfaction levels.The consumer behavior remains constant in the analysis.
The utility is expressed in terms of ordinal numbers.
Assumes marginal rate of substitution to diminish.
Indifference curves, like many aspects of contemporary economics, have been criticized for oversimplifying or making unrealistic assumptions about human behavior.
Other critics note that it is theoretically possible to have concave indifference curves or even circular curves that are either convex or concave to the origin at various points.

Number 2………
The budget constraint is the boundary of the opportunity set—all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income.A budget constraint occurs when a consumer is limited in consumption patterns by a certain income. budget constraints are determined by income such as rent and wages.
Utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions.
At this point marginal utility equates the price of the commodity. This MUx= Price x= 0
Utility maximization was first developed by utilitarian philosophers Jeremy Bentham and John Stuart MillUtility maximization means making economic decisions that guarantee the highest level of consumer satisfaction (benefit). An example is when a consumer decides to purchase more of “Product A” and less of “Product B” because this combination guarantees more benefit (utility) per dollar.

Number 3….
Cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed.
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices. In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point)
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium
Limitations of Cobweb theory include:
Rational expectations
Price divergence is unrealistic and not empirically seen.
It may not be easy or desirable to switch supply.
Other factors affecting price.
Buffer stock schemes.
Price divergence is unrealistic and not empirically seen.
Cobweb theory has played an essential role incorporating both features as explanations for endogeneity of price and production cycles in commodity markets. Empirical testing of cobweb models explored the possibility that “short run” supply and demand elasticities could produce temporary market instability.It may not be easy or desirable to switch supply.

Name:Ani Emmanuella Ngozi
Reg no:2020/249748
Department:Business Education
Course :eco 201
1a) Indifference curve is the curve that represents all the combinations of goods that provides an equal level of utility or satisfaction.
b)ASSUMPTIONS OF INDIFFERENCE CURVE
-) The price of the two goods is given
-) An indifference curve is negative inclined sloping downward
-)The consumer taste habit and income remains the same throughout the analysis
-)The consumer acts rationally so as to maximize satisfaction
-)An indifference curve is always convex to the origin
C) CRITICISMS OF INDIFFERENCE CURVE
-) it is based on unrealistic assumption of rationality perfect, competition, division of goods or preference
-)indifference curve is criticized on the ground that it cannot explain consumer behavior
-)indifference curve is non transitive
-) indifference curve considers different combination of two goods, there may be some combination that is meaningless and cannot be possible in real life
2A)Budget constraint is an economic term referring to the combined amount of item you can afford within the amount of income available to you .
2B)Utility maximization describes the effort of the consumer to obtain the greatest degree of utility or value from a purchases, while keeping the cost of the purchase as low as possible
3) Cobweb theory is the idea that price fluctuations can lead to fluctuation in supply which cause a cycle of rising and falling price.
* cobweb theory of business cycle was propounded in 1930 independently by professor H Schultz of America,J.Tinbergen of the Netherlands and U. Riaci of Italy.But it was Prof Nicholas kaldo in 1934 that assume there is an agricultural market where supply can vary due to variable factor such as weather, he named it cobweb because of the pattern of movement of price and output resembled a cobweb.
IT’S ASSUMPTIONS
-) A key determine of supply will be the price from the previous year.
-) The parameters determining the supply function having constant value over a series of period
-)Current demand (D1) for the commodity is a function of current price (P1)
-) A low price will make some farmers to go out of business
-)The commodity under consideration is perishable and can be stored only for one year
CRITICISMS OF COBWEB THEORY
-) output not determined by price: the theory assumes that the output is determined by the price only. In reality, agricultural output in particular is determined by several other factors also such as weather, seeds, technology.
-)This is not strictly a trade cycle theorem it’s concerned only with the farming sector. It’s says nothing in other sphere of production.
-)Not Realistic:it is not realistic to assume that the demand and supply conditions remains unchanged over the previous and current period so that the demand and supply curves do not change .
-)Continuous cobweb impractical: critics point out that continuous cobweb is impractical because it cannot continue indefinitely. This is because producer incite more loss than profit from it.
IMPLICATIONS OF COBWEB THEORY
-)The cobweb model is an oversimplification of the real price determination process but it supplies new information to the market participants about market behavior.
-) it’s significance lies in the demand, supply and price behavior of a agricultural commodities.
-)Expectations about future conditions have an important influence on current price.
TYPES OF COBWEB THEORIES
Divergent cobweb model
Continuous cobweb model
Convergent cobweb model

NAME: CHUKWU BRIDGET OLACHINYERE
REG NO: 2020/248249
COURSE: ECO 201
DEPARTMENT: ECONOMICS
★ 1). BRIEFLY DISCUSS THE INDIFFERENCE CURVE
We can’t talk of the indifference curve without talking about the ordinal approach to utility.
Ordinal approach to utility assumes that utility can be ranked at various levels of consumption. This approach requires that consumers make a scale of preference by choosing between the various commodities that gives one the same level of satisfaction.
This approach makes use of indifference curve.
◆THE INDIFFERENCE CURVE THEORY
The indifference curve analysis measures utility ordinally. It shows a combination of two goods (say X and Y) in various quantities that provides equal satisfaction (utility) to an individual.
The indifference curve that are farther away from the origin represent higher levels of satisfaction as they have larger combinations of X and Y.
◆ASSUMPTIONS OF INDIFFERENCE CURVE
1). The consumer acts rationally in order to maximize satisfaction.
2). There are only two goods in the market.
3). The consumer has complete knowledge about the prices of goods in the market.
4). The tastes, habits and income of the consumer remains the same.
5). The consumer prefers more of X to less of Y or more of Y to less of X.
6). An indifference curve is convex to the origin.
7). An indifference curve is negatively inclined, sloping downward.
8). The consumer is in a position to order all possible combination of the two goods.
◆CRITICISM OF INDIFFERENCE CURVE
1). Away from reality: According to Prof. Rohertson: ”the fact that the indifference hypothesis is more complicated of the two psychologically (with regards to the assertion that the indifference curve technique is superior to the cardinal utility analysis) happens to be more economical logically, affords no guarantee that it is nearer to the truth”.
2). Midway house: Indifference curves are hypothetical because they are not subject to direct measurement. Although consumer choices are grouped in combinations on the ordinal scale, no operational method has been devised so far to measure the exact shape of an indifference curve and so the structure of the theory has low empiric content.
3). Knight argues that the observed market behaviour of the consumer cannot be explained objectively with the help of the indifference analysis. Since individuals think and act subjectively, it is a mistake not to base the analysis of consumer’s demand on the cardinal utility theory.
4). Indifference curves are non–transitive: One of the greatest critics of the indifference hypothesis is W. E. Armstrong who argues that the consumer is indifferent no because he has complete knowledge of various combinations available to him but because of his inability to judge the difference between alternative combinations.
5). Another serious criticism levelled against the preference hypothesis is that it fails to explain consumer behaviour when the individual is faced with choices involving risk or uncertainty of expectations.
★ 2). WRITE SHORT NOTE ON BUDGET CONSTRAINT AND UTILITY MAXIMIZATION
◆ BUDGET CONSTRAINT
This is the total amount of items you can afford within a current budget. Budget constraint illustrates the range of choices available within that budget. Opportunity cost is the amount or item you give up in exchange for something else.
The budget constraint is the boundary of the opportunity set–all possible combination of consumption that someone can afford given the prices of goods and the individual’s income. Budget constraint is also known as ”Budgetary restriction”.
The formula for budget constraint line would be P1 * Q1 + P2 * Q2 = 1. A budget constraint occurs when a consumer is limited in consumption patterns by a certain income.
◆ UTILITY MAXIMIZATION
This is also known as consumer equilibrium. It is a point where a consumer derives maximum satisfaction when his or her marginal utility equals the price of the commodity. At this point, marginal utility is equal to zero.
That is MUX = 0.
This is the concept that individuals and organisations seek to attain the highest level of satisfaction from their economic decisions. Utility function measures the intensity to which an individual’s fulfillment is met.
It also means making economic decisions that guarantee the highest level of consumer satisfaction (benefit). An example is when a consumer decides to purchase more of ”product A” and less of ”product B” because this combination guarantees more benefit (utility). Utility maximization is important concept in consumer theory as it shows how consumers decude to allocate their income.
★ 3). EXTENSIVELY DISCUSS THE COBWEB THEORY
The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of market. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producer’s expectations about prices are assumed to be based on observation of previous prices.
Cobweb theory has played an essential role in corporating both features as explanation for endogeneity of price and production cycles in commodity markets. The idea of cobweb theory was proposed by Hungarian economist Nicholas Kaldor.
The cobweb theorem attempts to explain the regularly recurring cycles in the output and prices of farm products. In 1930 cobweb theory was advanced by the three economists in Italy namely: Henery Schultz (U. S. A), Jam Tinbergen (Netherland), and Althus Hanau (Italy). It was named cobweb because the pattern traced by the prices and output movements resembled a cobweb.
The cobweb theory of trade cycle has its chief application in the case if agricultural products, the supply of which can be increased or decreased with certain time–lag.
◆ ASSUMPTIONS OF COBWEB THEORY
This theorem is based on three assumptions:
1). Perfect competition in which each producer assumes that present prices wull continue and that his own production plans will not affect the market.
2). Price is completely a function of the preceding period’s supply.
3). The commodity concerned is perishable.
These assumptions show that the theory is particularly applicable to agricultural products.
◆ CRITICISM OF COBWEB THEORY
1). This is not strictly a trade cycle theorem for it is conconcerned only with the farming sector. There are a good many others sphere of production where it says nothing.
2). This theorem assumes that the output is solely governed by price. Thus us unrealistic assumption. The fact is that the output particularly of farm products us determined not only by price but by several other factors.
3). It is applicable only where:
a). The price is governed by the supply available.
b). When production is governed only by the consideration of price as wider perfect competition. and,
c). When production cannot vary before the expiry of one full period.
4). The theory is based upon the unsound assumption that the crop which farmer plants in 2008 depends solely on the prices ruling in 2007. As a matter of fact this is contrary to facts. When 2007 prices undoubtedly influence decisions regarding 2008 crops, producers are also influenced by their expectations.
◆ CONCLUSION OF COBWEB THEORY
We concluded that in spite of its shortcomings, the cobweb theory is important besides its application as an explanation for the cyclical behaviour of wheat and other agricultural products’ market. It concentrates attention on the important fact that the present events depends upon the past happenings, it furnishes us with a technique to demonstrate the process of over time.

NAME: ONUIGBO ADAEZE JENNIFER
REG NO : 2020/242608
DEPT: ECONOMICS
DATE: 12TH MARCH, 2023.

1. An indifference curve is a chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied—hence indifferent—when it comes to having any combination between the two items that is shown along the curve.
An indifference curve shows a combination of two goods in various quantities that provides equal satisfaction (utility) to an individual.
It is used in economics to describe the point where individuals have no particular preference for either one good or another based on their relative quantities.
Along the curve, a consumer thus has an equal preference for the various combinations of goods shown.
Typically, indifference curves are shown convex to the origin, and no two indifference curves ever intersect.

Assumptions of indifference curve are
The indifference curve analysis retains some of the assumptions of the cardinal theory, rejects others and formulates its own. The assumptions of the ordinal theory are the following:
(1) The consumer acts rationally so as to maximise satisfaction.
(2) There are two goods X and Y.
(3) The consumer possesses complete information about the prices of the goods in the market.
(4) The prices of the two goods are given.
(5) The consumer’s tastes, habits and income remain the same throughout the analysis.
(6) He prefers more of X to less of У or more of Y to less of X.
(7) An indifference curve is negatively inclined sloping downward.
(8) An indifference curve is always convex to the origin.
(9) An indifference curve is smooth and continuous which means that the two goods are highly divisible and those levels of satisfaction also change in a continuous manner.
(10) The consumer arranges the two goods in a scale of preference which means that he has both ‘preference’ and ‘indifference’ for the goods. He is supposed to rank them in his order of preference and can state if he prefers one combination to the other or is indifferent between them.
(11) Both preference and indifference are transitive. It means that if combination A is preferable to В, and В to C, then A is preferable to C. Similarly, if the consumer is indifferent between combinations A and B, and В and C, then he is indifferent between A and C. This is an important assumption for making consistent choices among a large number of combinations.
(12) The consumer is in a position to order all possible combinations of the two goods.

Criticisms of the Indifference curve
1. Old wine in new bottle:
Professor Robertson does not find anything new in the indifference cure technique and regards it simply ‘the old wine in a new bottle’.
It substitutes the concept of preference for utility. It replaces introspective cardinalism by introspective ordinalism. Instead of the cardinal numbers such as 1, 2, 3, etc., ordinal numbers I, II, III, etc. are used to indicate consumer preferences. It substitutes marginal utility by marginal rate of substitution and the law of diminishing marginal utility by the principle of diminishing marginal rate of substitution.
Instead of Marshall’s proportionality rule or consumer’s equilibrium, which expresses the ratio of the marginal utility of a good to its price with that of another good, the indifference curve technique equates the marginal rate of substitution of one good for another to the price ratio of the two goods. Thus this technique fails to bring a positive change in the utility analysis and merely gives new names to the old concepts.
2. Away from Reality::
With regard to the assertion that the indifference curve technique is superior to the cardinal utility analysis because it is based on fewer assumptions, Prof. Robertson observes: “The fact that the indifference hypothesis, the more complicated of the two psychologically, happens to be more economical logically, affords no guarantee that it is nearer to the truth.” He further asks, can we ignore four- feeted animals on the ground that only two feet are needed for walking?

(3) Fails to Explain the Observed Behaviour of the Consumer:
Knight argues that the observed market behaviour of the consumer cannot be explained objectively. It is a mistake not to base the analysis of consumer’s demand on the cardinal utility theory. For instance, the income and substitution effects cannot be distinguished on the basis of mere observation. In fact, what we observe is the composite price effect. Similarly, the theory of complementaries and substitutes based on the principle of marginal rate of substitution cannot be discovered from the market data. Samuelson has explained the observed behaviour of the consumer in his Revealed Preference Theory.
(4) Indifference Curves are Non-transitive:
One of the greatest critics of the indifference hypothesis is W.E. Armstrong who argues that the consumer is indifferent not because he has complete knowledge of the various combinations available to him but because of his inability to judge the difference between alternative combinations. He further opines that any two points on an indifference curve are the points of indifference not because they are of iso-utility but of zero-utility difference.
(5) The Consumer is not Rational:
The indifference analysis, like the utility theory, assumes that the consumer acts rationally. He is of a calculating mind who carries innumerable combinations of different commodities in his head, can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods. This is too much to expect of the consumer who has to act under various social, economic and legal constraints.
(6) Combinations are not based on any Principle:
Since the combinations are made irrespective of the nature of goods, they often become absurd. How many of us buy 10 pairs of shoes and 8 pants, 6 radios and 5 watches or 4 scooters and 3 cars? Such combinations do not possess any significance for the consumer.
(7) Limited Analysis of Consumer’s Behaviour:
Further, the assumption that the consumer buys more units of the same good when its price falls is unwarranted. Leaving aside the case of inferior goods, he may not like to have more units of a good because he is under the influence of “conspicuous consumption” and wants to display or to have variety. Changes in the tastes of the consumer or his indulging in speculative purchases also affects his preference for the goods. These exceptions make the indifference analysis a limited study of consumer behaviour.
(8) Failure to consider some other Factors concerning Consumer Behaviour:
The indifference curve analysis does not consider speculative demand, interdependence of the preferences of consumers in the form of snob, Veblen and Bandwagon effects, the effects of advertising, of stocks, etc.
(9) Two-Goods Model Unrealistic:
Again, the two-goods model on which the indifference analysis is based makes the theory unrealistic because a consumer buys not two but a large number of commodities to satisfy his innumerable wants. But the difficulty is that in the case of more than three goods geometry fails and economists will have to depend upon complicated mathematical solutions for analysing the problem of consumer behaviour.
(10)Fails to Explain Consumer’s Behaviour in Choices Involving Risk or Uncertainty:
Another serious criticism levelled against the preference hypothesis is that it fails to explain consumer behaviour when the individual is faced with choices involving risk or uncertainty of expectations. If there are three situations, A, В and C, the consumer prefers A to В and С to A and out of which A is certain but the chances of occurring В or С are 50-50 . In such a situation, the consumer’s preference for С over A can only be measured quantitatively.
(11) Based on Unrealistic Assumption of Perfect Competition:
The indifference curve technique is based on the unrealistic assumptions of perfect competition and homogeneity of goods whereas, in reality, the consumer is confronted with differentiated products and monopolistic competition. Since the indifference hypothesis is based on unwarranted assumptions, it becomes unrealistic.
(12)All Commodities are not Divisible
The indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units. Commodities like watches, cars, radios, etc. are indivisible. To have 3½ watches or 2½ cars or 1½ radios in any combination is unrealistic. When indivisible goods are taken in a combination, they cannot be substituted without dividing them. Thus the consumer cannot get maximum satisfaction from the use of indivisible goods.
Despite these criticisms, the indifference curve technique is still regarded superior to the Marshallian introspective cardinalism.

2. The budget constraint is the set of all the bundles a consumer can afford given that consumer’s income. We assume that the consumer has a budget—an amount of money available to spend on bundles. For now, we do not worry about where this money or income comes from; we just A budget constraint occurs when a consumer is limited in consumption patterns by a certain income.
When looking at the demand schedule we often consider effective demand. Effective demand is what people are actually able to spend given their limitations of income.
Temporary budget constraints can be overcome by borrowing, but in the long term budget constraints are determined by income such as rent and wages.assume a consumer has a budget.

Features of Budget Constraint or Budget Line
Some of the properties of the budget line are as follows:
1. Negative slope: If the line is downward, it shows a reverse correlation between the two products.
Straight line: It indicates a continuous market rate of exchange in individual combinations.
2. Real income line: It denotes the income and the spending size of a customer.
Tangent to indifference curve: It is the point when the indifference curve meets the budget line. This point is known as the consumer’s equilibrium.

Assumptions of a Budget Constraint
The budget line is mostly based on the assumption and not reality. However, to get clear and precise results and summary, the economist considers the following points in terms of a budget line:
a. Two commodities: The economist assumes that the customers spend their income to purchase only two products.
b. Income of the customers: The income of the customer is limited, and it is designated to buy only two products.
c. Market price: The cost of each commodity is known to the customer.
Expense is similar to income: It is assumed that the customer spends and consumes the whole income.
d. Quick link: Foreign Trade during Colonial Rule

A shift in Budget Line
A budget line includes a consumer’s earnings and the rate of a commodity. These are the two important factors that shift the budget line.
A. Shift due to change in price: The amount of the product either increases or decreases from time to time. For instance, if the price and income of product A remains constant and the price of product B decreases, then the buying potential of product B automatically increases. Similarly, if the price of B increases and the other factors remain steady, the demand for product B automatically decreases.

B. Shift due to change in income: Change in income makes a huge difference that leads to a change in the budget line. High income means high purchasing possibility and low income means low purchasing potential, making the budget line to shift.

Utility Maximisation
Utility maximisation refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions.
For example, when deciding how to spend a fixed some, individuals will purchase the combination of goods/services that give the most satisfaction.
Utility maximisation can also refer to other decisions – for example, the optimal number of hours for labour to supply their labour. Working more increases income, but reduces leisure time.

Classical economics
Utility maximisation is an important concept in classical economics. It developed from the utilitarian philosophers of Jeremy Bentham and John Stuart Mill. Early economists such as Alfred Marshall incorporated utility maximisation into economic theory.
An important assumption of classical economics is that the price consumers are willing to pay is a good approximation to the utility that they get from the good. If people are willing to pay £800 for an iPhone X, then this suggests the consumer must get a utility of at least £800.

Diminishing marginal utility
Economists such as Carl Menger, William Stanley Jevons and Marie-Esprit-Léon Walras. And Alfred Marshall developed ideas such as diminishing marginal utility. The idea that after a certain point, extra quantities of a good lead to a decline in the marginal utility. (For example – The first car gives high utility, but the utility of a second is much lower.
Marginal utility shapes an individual demand curve, as the utility from extra units declines, consumers are willing to pay a lower price – hence a downwardly sloping demand curve.

Ways of showing utility maximisation is through the use of indifference curves and budget lines
Indifference curves show different combinations of goods which gave the same utility.
A budge line shows disposable income and the maximum potential goods that can be bought
Indifference curves further to the right are more desirable as they have bigger combinations of goods.
Utility will be maximised at the furthest indifference curve still affordable.

Limitations of utility maximisation
a. Ordinal utility. Ordinal utility states consumers find it hard to give exact values of utility, but they can order by preference – e.g. I prefer apples to bananas. This theory of ordinal utility was developed by John Hicks and gives less precise but rough guides to utility of consumers.
b. Irrational behaviour. Classical economics generally assumes individuals are rational and seek to maximise utility. However, in the real world, this may not be the case. Other factors affecting choice
c. Impulsive behaviour – buying goods which are later regretted.
d. Loyalty, e.g. loyalty to local shops rather than buy cheaper from supermarkets.
e. Sense of morality, e.g. not drinking alcohol.

3. Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Assumptions of Cobweb theory
a. In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
b. A key determinant of supply will be the price from the previous year.
c. A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
d. Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
e. If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
f. However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
g. If supply is reduced, then this will cause the price to rise.
h. If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

Cobweb theory and price divergence
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point)
If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.

Cobweb theory and price convergence
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium

Limitations of Cobweb theory
A. Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

B. Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

C. It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

D. Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

E. Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

Possible example of Cobweb theory
Housing
Housing is very inelastic and subject to booms and bust. In response to the housing boom in Ireland, supply increased. But, the price collapsed, leading to a big fall in the building of new housing. Tamari, (1981) argued there was evidence of cobweb nature of the Israeli housing market.

Name: Igboji Divinegift Onyinyechi
Reg. No: 2020/244348
Answers
1. An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent.Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility.
Indifference curve adopted the concept of ordinal school of thought.
*Assumptions*
The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice. The consumer is expected to buy any of the two commodities in a combination. Consumers can rank a combination of commodities based on their satisfaction levels.
*Criticism*
Indifference curve is said to make unrealistic assumptions about human behaviour. It is unable to explain risky choices undertaken by the consumer.
2. Budget constraints shows the possible combinations of different goods the consumer can buy given his/her income and the prices of the good. Changes in income and changes in prices produce changes in the budget constraint.
Utility maximisation is the attainment of the greatest possible total utility. While consumers would want to attain maximum utility, they are constrained by the available income and the prices of goods and services.
3. The cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed.

NAME: OZOR PAMELLA CHISOM
REG NO: 2020/247089
DEPARTMENT: EDUCATION ECONOMICS
EMAIL: Ozorpamella05@agmail.com

INDIFFERENCE CURVE
An indifference curve (IC) is the locus of all those combinations of any two goods that yields the same level of satisfaction to the consumer. It represents the same level of satisfaction of a consumer from different bundles of commodities i.e. the satisfaction or pleasure that a consumer can get leftovers the identical lengthways of an Indifference Curve.

ASSUMPTIONS
1. The consumer consumes only two goods
2. There is the possibility of substituting one good for another but there is no perfect substitution
3. Two goods are divisible
4. The consumer must be rational
5. The marginal rate of substitution diminishes
6. Transitivity and consistency in choice
7. Ordinal measurement of utility

CRITICISM
1) Assumptions of the analysis are unrealistic: The indifference curve technique is based on the unrealistic assumptions of perfect competition and homogeneity of goods whereas, in reality, the consumer is confronted with differentiated products and monopolistic competition. Since the indifference hypothesis is based on unwarranted assumptions, it becomes unrealistic.
2) It does no take into account the risk of the choices: Another serious criticism levelled against the preference hypothesis is that it fails to explain consumer behaviour when the individual is faced with choices involving risk or uncertainty of expectations.
3) All Commodities are not Divisible: The indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units. Commodities like watches, cars, radios, etc. are indivisible. To have 3½ watches or 2½ cars or 1½ radios in any combination is unrealistic.
4) Indifference Curves are Non-transitive: consumer is indifferent not because he has complete knowledge of the various combinations available to him but because of his inability to judge the difference between alternative combinations.
5) The Consumer is not Rational: The indifference analysis, like the utility theory, assumes that the consumer acts rationally. He is of a calculating mind who carries innumerable combinations of different commodities in his head, can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods. This is too much to expect of the consumer who has to act under various social, economic and legal constraints.
6) Combinations are not based on any Principle: Since the combinations are made irrespective of the nature of goods, they often become absurd.

BUDGET CONSTRAINTS
Budget constraint is the total amount of items you can afford within a current budget.
Budget constraint illustrates the range of choices available within that budget.

UTILITY MAXIMIZATION
Is a point where a consumer derives maximum satisfaction when his or her marginal utility equates the price of the commodity.
It is the attainment of the greatest possible total utility.

COBWEB’S THEORY
The cobweb theorem is an economic model used to explain how small economic shocks can become amplified by the behaviour of producers. The amplification is, essentially, the result of information failure, where producers base their current output on the average price they obtain in the market during the previous year. This is, to some extent, a non-rational decision, given that a supply side shock between planting and harvesting (such as an unexpectedly good or bad harvest) can lead to an unexpectedly lower or higher price. This results in either a higher output or a lower output in subsequent years, and moves the market into a long-term disequilibrium position

1: The indifference curve theory shows a combination of two goods X and Y in various quantities that provides equal satisfaction (Utility). It is used to describe the point where individual have a particular preference for either one good or another based on their quantities.

Assumptions:
a) In indifference curve, the prices of the two goods are given
b). The consumer taste habits and income remain constant during the analysis
c). There are only two goods X and Y
d). The consumer acts rationally as to maximize satisfaction

Criticism:
a). In between two indifference curves are the same plane as M and A, the consumer will still prefer every point in the space on the diagram
b). Indifference curve can neither be touched nor intersect
c). An indifference curve cannot touch each axis
d). An indifference curve is not necessarily parallel to each other.

2:. A budget constraint of a consumer requires that the amount of money spent on the two goods be no more than the total amount the consumer has to spend
Budget constraint is the analysis that shows all those combinations of two goods which the consumer can buy by spending his given income on the two goods at their given prices
It is noted that any combination of the goods will beyond the reach of the consumer. But, any combination lying within the budget line will be well within the reach of the consumer.

3: Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices. In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Assumptions Of Cobweb Theory:
a) In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be.
b) A key determinant of supply will be the price from the previous year.
c) A low price will mean some farmers go out of business.
d) Also, a low price will discourage farmers from growing that crop in the next year.

Name: ogbuagu daniella Agnes
Reg no: 2020/242618
Department: economics
Email address: kweendee44@gmail.com

Question 1.
Indifference curve can be defined as the analysis uses to measure utility ordinally. It shows a combination of two goods ; goods X and goods Y.
It is used to describe the point where individuals have no particular preference for either one good or the other.
The Assumption of indifference curve.
1. Consumers act rationally so as to maximize satisfaction
2. There are two goods . Good X and Good Y.
3. The consumer posseses information about price of goods in the market.
4. The prices of foods are always given.

Question 2.
Budget constraints
It is all the combination of goods and services that a consumer may purchase given current prices within his/her income. Here, the consumer can only purchase as much as their income allow.( Constraints).
P_X+P_Y=M. Where, P_X is price of goods X and P_Yis price of goods Y and M=income.

Question 3.
Cobwebs theory.
This is the idea that price fluctuation can lead to fluctuation in supply. It is an economic model that is used to explain how small economic shocks can become amplified by the behavior of producers.
It simply means change in price leads to fluctuation in supply and causes a cycle of rising and falling price

NAME: OKAFOR CHIOMA NANCY
REG.NO: 2020/242649
DEPT.: ECONOMICS
COURSE: ECO 201

1. The indifference curve
An indifference curve is a chart showing various combinations of two goods or commodities that leave the consumer equally well off or equally satisfied.It is used in economics to describe the point where individuals have no particular preference for either one good or another based on their relative quantities.Indifference curves are used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget.
Some of the assumptions which the indifference curve operates under include;
– There are only two goods, X and Y.
-The consumer acts rationally so as to maximise satisfaction.
– The consumer possesses complete information about the prices of the goods in the market.
– The consumer’s tastes, habits and income remain the same throughout the analysis.
-An indifference curve is always convex to the origin and this shows that there is a marginal rate of substitution.
The indifference curve theory has also gathered a few criticisms some of which are that it is based on unrealistic expectations of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference, completely negating the imperfections in the decision making process of the consumer.

2a. Budget constraint:
In economics, a budget constraint refers to all possible combinations of goods that someone can afford, given the prices of goods, when all income (or time) is spent. It occurs when a consumer is limited in consumption patterns by a certain income.The consumer can only purchase as much as their income will allow, hence they are constrained by their budget. As a result, the households will have to make a choice on the best ways to spend it’s resources based on its given income.

2b. Utility maximization:
Utility maximisation refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions or expenditures. The individual can maximize total utility by reducing their expenditure on certain commodities whose increased consumption yield low satisfaction and increase expenditure on others which give him a higher level of satisfaction. Utility is maximized at the point where the marginal utility of the commodity is equal to the price paid for it.

3. The cobweb theory:
The cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
some other assumptions around this theory include;
– In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be.
– A key determinant of supply will be the price from the previous year.
– A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
– Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand).
A major criticism of the theory is that the model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world.

Name: Nnamdi Ezinne Adaobi
Reg:2020/242891
Email: ezinnennamdi101@gmail.com
Dept:combined social sciences (eco/soc)
Course:Eco 201

Answers

What is Indifference Curve?

An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent.

*The assumptions of the indifference curve

(1) The consumer acts rationally so as to maximise satisfaction.

(2) There are two goods X and Y

(3) The consumer possesses complete information about the prices of the goods in the market.

(4) The prices of the two goods are given.

(5) The consumer’s tastes, habits and income remain the same throughout the analysis.

*Criticisms of the indifference curve

1. Unrealistic assumptions:
It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.

The purchases of a consumer arc very much affected by habits, customs and fashion. Therefore, a consumer does not act always rationally. We cannot expect a consumer to know his indifference map. Goods Visible and perfect completion is a myth.

2. No novelty:
Prof. D.H. Robertson remarked that the indifference curve technique is merely “An old wine in new bottle.”

This technique is similar to the utility analysis because it merely gave new names to old terms. The concept of utility is replaced by scale of preference, tendency of diminishing marginal utility is replaced by diminishing marginal rate of substitution and cordinal numbers such as 1, 2, 3 etc., were labelled as ordinal numbers I, II, III, etc.

3. Indifference curve is non-transitive:
Prof. W.E. Armstrong has argued that a consumer is indifferent between close alternative combinations only because he is not able to perceive the difference between the two.

But as the difference of combinations increases, the difference in the satisfaction of different combinations becomes evident and so the different combinations on the same indifference curve do not yield equal satisfaction.

Thus, if Armstrong argument is accepted different points on an indifference curve give different satisfaction. The indifference curve will become non-transitive.

4. Fails to explain risky choice:
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.

To make a choice among uncertain alternatives quantitative measurement of utility is needed to decide whether the risk is worth taking. In such situations cordinal system of utility can explain consumer bahaviour.

5. Absurd and unrealistic combinations:
Indifference curve analysis is based on hypothetical combinations. When we consider different combinations of two goods, then there may be some combinations that are meaningless and cannot be possible in real life.

6. Does not provide behaviouristic explanation of consumer behaviour:
The indifference map is hypothetical in nature and is not based on observed market behaviour. It is subjective in nature instead of objective.

The reason is that it does not set up functions and curves in purely objective terms. Purely objective indifference curves can be possible only if it is possible to obtain quantitative data.

The logical structure of indifference curve theory is such that it is difficult to quantity indifference curves. Though attempts have been made to quantity indifference curve but success is very limited.

7. Based on weak ordering:
Indifference curve analysis is based on the weak ordering hypothesis i.e., a consumer can be indifferent between a large number of combinations.
BUDGET CONSTRAINT AND UTILITY MAXIMIZATION
budget constraint refers to all possible combinations of goods that someone can afford, given the prices of goods, when all income (or time) is spent.

Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions.

Cobweb theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.

In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Name: Emmanuel patience N
Reg no: 2020/248472
Dept: business Education
Faculty: vocational and technical education
Email: preciousemmanuel530@gmail. Com

1: an indifference curve is a locus point representing different combinations of two goods which yields equal utility to the consumer so that the consumer is indifferent to the combination consumed.
Assumptions
1) more of commmodity is better than less
2) preference or indifferences of consumer are transiting
3) Diminishing marginal rate of substitution

Criticisms
It has been criticized for being an old wine in a new bottle for it merely rehashed the concept of diminishing marginal utility of a product in a new terms.

2: budget constraints is the total amount of items one can afford within a current budget , it illustrates the range of choices available within that budget

Utility maximization is the concept that individual and organizations seek to attain the highest level of satisfaction from their economic decisions.

3: the cobweb theory was propounded in 1930 independently by many people, the cobweb model is used to explain the dynamics of demand, supply and price over long periods of time.
Assumptions
1) Both supply and demand function are linear
2) the current year supply depend upon the last year decision regarding output
3)the current period of year is divided into sub period of week or fortnight etc

SYLVANUS FAVOUR CHINAGOROM
2020/242141

1. Indifference curve is a graphical representation of combined products that gives similar kind of satisfaction to a consumer there by making them indifferent.
In economics, an Indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent.
That is any combinations of two products indicated by the curve will provide the consumer equal levels of utility, and the consumer has no preference for one combination on the same bundle of goods over a different combination on the same curve.
Indifference curve is downward sloping and negative.

ASSUMPTIONS OF INDIFFERENCE CURVE

1. The consumer is rational to maximize the satisfaction and make a transitive or consistent choice.
2. Price of goods is constant.
3. There are two good X and Y.
4. Two Indifference curves never intersect each other
5. The consumer prefers more or X to less Y or more of Y to less X .
6. An Indifference curve is always convex to the origin.

CRITICISM OF INDIFFERENCE CURVE
1. Indifference curve is said to make unrealistic assumptions about human behaviour.
2.lt is unable/cannot explain risky choices undertaken by the consumer.
3. It’s an’ old wine in a new bottle’for it has merely rehashed the concept of diminishing marginal utility of a product in new terms.
4. Indifference curve are non-transitive.
5. It’s analysis is based on the weak ordering hypothesis.

2. Budget constraint is an economic term which simply shows what consumer can afford.it also represents all combinations of goods and services that a consumer may purchase given current prices within his/her given income.
It refers to the maximum combined item one can afford with the income generated by the individual. Based on the money available each amount, an individual must allocate their funds efficiently to purchase goods and services.
The formula of Budget constraint is expressed as follows:
(P1×Q1)+(P1×Q2)=M.
UTILITY MAXIMIZATION.
Utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction for economic decisions.
It means making economic decisions that guarantee the highest level of consumer satisfaction (benefit).
The condition for maximising is:MUA/PA=MUB/PB ; Where MU=is marginal utility and price.

3. Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.it describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producer’s expectations about prices are assumed to be based on observations of previous prices. In simple cobweb, we assume there is an agricultural market where supply can vary due to variable factors, such as whether.
ASSUMPTIONS OF COBWEB THEORY.
1. If there is a very good harvest,then supply will be greater than expected and this Will cause a fall in price
2. However,this fall in price may cause some Farmers to go out of business. Next year farmers may be put off by the low price and producer something else. The consequences is that if we have one year of low prices, next year farmers will reduce supply.
3. If supply is reduced,then this will cause the price to rise.
4. If farmers see high prices and high profits,then next year they are inclined to increase supply because that product is more profitable.
In theory,the market could fluctuate between high price and low prices as suppliers respond to past prices.
COBWEB HAVE BEEN DIVIDED INTO:
1. Continuous cobwebs: The fluctuations in price and output continues repeating about equilibrium at same level.
2. Divergent cobwebs: The amplitude of the fluctuation increases with the passage of time. Once disturbed from position of equilibrium the economy moves cumulatively away from it into the dole drums of disequilibrium. This happens when the slope of the supply curve less steep than the slope of demand curve.
3. Convergent cobwebs: In this case, the economy of and when disturbed from its equilibrium position,has a tendency to regain it through a series of oscillations. Each fluctuations is move damped than the one preceding it. This narrowing down of the amplitude of the fluctuations occurs when the slope of the supply curve is steeper than the demand curve.

Important Assumptions of Indifference Curve Analysis
Article shared by
Indifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution.

The various assumptions of the analysis are explained below.

(a) Non Satiety:
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This assumption implies that the consumer has not reached the point of saturation in the consumption of any good. Thus, he always prefers to have more of both commodities. He always tries to move to a higher indifference curve to get higher and higher satisfaction. This assumption is called monotonicity of preferences.

(b) Completeness:
To enable the consumer to make an optimal choice in the commodity space (entire area lying between the X-axis and Y-axis, it is assumed that between any two bundles, either the consumer is indifferent or one is preferred to other. Thus, every commodity bundle will lie on some indifference curve.

(c) Transitivity:
It is assumed that consumer’s choices are characterised by transitivity and consistency. Given three commodities bundles ‘A’, ‘B’, and ‘C’, if a consumer prefers ‘B’ to ‘A’ and ‘C’ to ‘B’, he will definitely prefers ‘C’ to ‘A’.

That is, if B > A, C > B, then C > A. Similarly, if the consumer is indifferent between ‘A’ and ‘B’, ‘B’ and ‘C\ then he will be indifferent between ‘A’ and ‘C’. The consistency assumption implies well defined preferences, that is, if A A.

(d) Diminishing Marginal Rate of Substitution:
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It is assumed that both the commodities ‘X’ and ‘Y’ obey the law of diminishing marginal utility, even if one of the commodities is money. It implies, as more and more units of ‘X’ are substituted for ‘Y’, consumer will be ready to sacrifice lesser and lesser units of ‘Y’ for each additional unit of ‘X’. Similarly, consumer will be ready to give up lesser and lesser units of commodity ‘X’ for each additional unit of commodity ‘Y’.

(e) Two Commodities:
It is assumed that consumer has a fixed amount of money whole of which is to be spent on the two goods, given constant prices of both the goods. This is a very restrictive assumption, because, in reality, the consumer deals with a large number of commodities. This restrictive assumption is made to facilitate graphic representation of indifference curves.

Though, we can have (at the most) three dimensional diagrams to handle three commodities case, but, is very difficult to work with it. The problem of multi commodities can be overcome by treating a number of commodities as the composite commodity or more conveniently by money.
Utility Maximization: Budget Constraints & Consumer Choice
Instructor: Kevin Newton
Show bio

Cite this lesson

In utility maximization, consumers strive to spend money in ways that provide the greatest amount of resources and satisfaction for the least cost. Learn about budget constraints and consumer choices in the context of utility maximization, review utility as it pertains to consumers, and understand why consumers care about this and the impact if they ignore it. U
Utility for Consumers
Let’s say that you are a college student whose part-time job
ut that doesn’t mean that you don’t have to care about utility. Say that the choice for Friday night is between a show of student bands put on by the college activities council and a concert by your favorite band. The student show is free, but the concert is $50 a ticket. Unless you have a really good reason to go to the student show, chances are you will be inclined to spend that $50 on concert tickets. Now, you couldn’t do that if you earlier skipped through the quad throwing money at random people, could you? By paying attention to the utility that your resources can bring you, you can make sure you’re at the concert where you want to be.

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Impact if Ignored
Really comical things happen if a consumer ignores utility. Early in this lesson, I alluded to the idea of a person throwing money at random people. Now, obviously there are some examples, especially in music, of people throwing money up in the air. For the individuals who do this, there may be some level of utility gained from the enjoyment of knowing that they are wealthy enough to afford to literally throw money away. Chances are that you don’t want that to happen to your $200 paycheck.

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Create your account

Lesson Summary
In this lesson, we focused on the importance of utility for consumers. Using the example of a college student’s earnings from a part-time job, we looked at how the real resource at play in economics is not money, but utility. We gave examples of actions that maximize utility, such as the opportunity to go to a professional concert instead of a college-run one. Additionally, we saw how utility can change given the particulars of the situation, such as the decision to take a loved one to a nice dinner versus having pizza and sodas with friends. Finally, we learned how the consequences of not paying attention to utility are not always puzzling decisions, like throwing money in the air, but result in real frustration, like when you download a movie, hate it, and can’t get a refund.

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Important Assumptions of Indifference Curve Analysis Article shared by Indifference curves analysis is based upon some assumptions, which determine its strength, applicability and shortcomings. W.J. Baumol has taken three main assumptions of non-satiety, transitivity and diminishing marginal rate of substitution. The various assumptions of the analysis are explained below. (a) Non Satiety: ADVERTISEMENTS: This assumption implies that the consumer has not reached the point of saturation in the consumption of any good. Thus, he always prefers to have more of both commodities. He always tries to move to a higher indifference curve to get higher and higher satisfaction. This assumption is called monotonicity of preferences. (b) Completeness: To enable the consumer to make an optimal choice in the commodity space (entire area lying between the X-axis and Y-axis, it is assumed that between any two bundles, either the consumer is indifferent or one is preferred to other. Thus, every commodity bundle will lie on some indifference curve. (c) Transitivity: It is assumed that consumer’s choices are characterised by transitivity and consistency. Given three commodities bundles ‘A’, ‘B’, and ‘C’, if a consumer prefers ‘B’ to ‘A’ and ‘C’ to ‘B’, he will definitely prefers ‘C’ to ‘A’. That is, if B > A, C > B, then C > A. Similarly, if the consumer is indifferent between ‘A’ and ‘B’, ‘B’ and ‘C\ then he will be indifferent between ‘A’ and ‘C’. The consistency assumption implies well defined preferences, that is, if A A. (d) Diminishing Marginal Rate of Substitution: ADVERTISEMENTS: It is assumed that both the commodities ‘X’ and ‘Y’ obey the law of diminishing marginal utility, even if one of the commodities is money. It implies, as more and more units of ‘X’ are substituted for ‘Y’, consumer will be ready to sacrifice lesser and lesser units of ‘Y’ for each additional unit of ‘X’. Similarly, consumer will be ready to give up lesser and lesser units of commodity ‘X’ for each additional unit of commodity ‘Y’. (e) Two Commodities: It is assumed that consumer has a fixed amount of money whole of which is to be spent on the two goods, given constant prices of both the goods. This is a very restrictive assumption, because, in reality, the consumer deals with a large number of commodities. This restrictive assumption is made to facilitate graphic representation of indifference curves. Though, we can have (at the most) three dimensional diagrams to handle three commodities case, but, is very difficult to work with it. The problem of multi commodities can be overcome by treating a number of commodities as the composite commodity or more conveniently by money. Utility Maximization: Budget Constraints & Consumer Choice Instructor: Kevin Newton Show bio Cite this lesson In utility maximization, consumers strive to spend money in ways that provide the greatest amount of resources and satisfaction for the least cost. Learn about budget constraints and consumer choices in the context of utility maximization, review utility as it pertains to consumers, and understand why consumers care about this and the impact if they ignore it. U Utility for Consumers Let’s say that you are a college student whose part-time job ut that doesn’t mean that you don’t have to care about utility. Say that the choice for Friday night is between a show of student bands put on by the college activities council and a concert by your favorite band. The student show is free, but the concert is $50 a ticket. Unless you have a really good reason to go to the student show, chances are you will be inclined to spend that $50 on concert tickets. Now, you couldn’t do that if you earlier skipped through the quad throwing money at random people, could you? By paying attention to the utility that your resources can bring you, you can make sure you’re at the concert where you want to be. To unlock this lesson you must be a Study.com Member. Create your account Impact if Ignored Really comical things happen if a consumer ignores utility. Early in this lesson, I alluded to the idea of a person throwing money at random people. Now, obviously there are some examples, especially in music, of people throwing money up in the air. For the individuals who do this, there may be some level of utility gained from the enjoyment of knowing that they are wealthy enough to afford to literally throw money away. Chances are that you don’t want that to happen to your $200 paycheck. To unlock this lesson you must be a Study.com Member. Create your account Lesson Summary In this lesson, we focused on the importance of utility for consumers. Using the example of a college student’s earnings from a part-time job, we looked at how the real resource at play in economics is not money, but utility. We gave examples of actions that maximize utility, such as the opportunity to go to a professional concert instead of a college-run one. Additionally, we saw how utility can change given the particulars of the situation, such as the decision to take a loved one to a nice dinner versus having pizza and sodas with friends. Finally, we learned how the consequences of not paying attention to utility are not always puzzling decisions, like throwing money in the air, but result in real frustration, like when you download a movie, hate it, and can’t get a refund.

Answer to question 1
What Is an Indifference Curve?
An indifference curve is a chart showing the combinations of two goods or commodities that leave the consumer equally satisfied thereby making the consumer indifferent.
.Assumptions of indifference curve are:
1. Consumer is rational; 
2. Price of goods is constant;
3. Higher IC curve gives the highest satisfaction and lowest curve gives lowest satisfaction;
4. Two IC curves never intersect each other;
5. Consumers spend a small part of their income.
Criticisms of the Indifference Curve
Indifference curves, like many aspects of contemporary economics, have been criticized for oversimplifying or making unrealistic assumptions about human behavior.
For example, consumer preferences might change between two different points in time, rendering specific indifference curves practically useless. Other critics note that it is theoretically possible to have concave indifference curves or even circular curves that are either convex or concave to the origin at various points..
Answer to question 2
What is a budget constraint?
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you..Budget constraint equation
(P1 x Q1) + (P2 x Q2) = m
In this equation, P1 is the cost of the first item, P2 is the cost of the second item and m is the amount of money available. Q1 and Q2 represent the quantity of each item you are purchasing.
Utility maximisation
Utility maximisation refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions.
For example, when deciding how to spend a fixed some, individuals will purchase the combination of goods/services that give the most satisfaction.
Utility maximisation can also refer to other decisions – for example, the optimal number of hours for labour to supply their labour. Working more increases income, but reduces leisure time.
Answer to question 3
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
Assumptions of Cobweb theory
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand).
Limitations of Cobweb theory
Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.
It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to coconuts

Eco 201 Online Quiz and Discussion (Budget constraint and others)—-6/3/2023
1) Briefly discuss the indifference curve(including its assumptions and criticisms)
2) Write short note on Budget constraint and utility maximization
3) Extensively discuss the Cobweb theory.
1. An indifference curve shows a combination of two goods in various quantities that provides equal satisfaction (utility) to an individual. It is used in economics to describe the point where individuals have no particular preference for either one good or another based on their relative quantities.
In other words, two commodities are perfect substitutes for each other – In this case, the indifference curve is a straight line, where MRS is constant. Two goods are perfect complementary goods – An example of such goods would be gasoline and water in a car. In such cases, the IC will be L-shaped and convex to the origin.

INDIFFERENCE CURVE ASSUMPTIONS
The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
The consumer is expected to buy any of the two commodities in a combination.
Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
The consumer behavior remains constant in the analysis.
The utility is expressed in terms of ordinal numbers.
Assumes marginal rate of substitution to diminish.

Examples
Jack has 1 unit of cloth and 8 units of the book. He decides to exchange 4 units of books for an additional piece of cloth. The following situations may occur:

Jack is satisfied with 1 unit of cloth and 8 units of books.
He is also satisfied with 2 units of cloth and 4 units of books.
In conclusion, Jack has the same level of satisfaction and utility in both situations as a consumer. He can utilize the following combinations based on his choice:

Combination Cloth Books

A 1 8
B 2 4
C 3 2

CRITICISMS OF INDIFFERENCE CURVE
1. UNREALISTIC ASSUMPTIONS:
It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.

The purchases of a consumer arc very much affected by habits, customs and fashion. Therefore, a consumer does not act always rationally. We cannot expect a consumer to know his indifference map. Goods Visible and perfect completion is a myth.

2. NO NOVELTY:
Prof. D.H. Robertson remarked that the indifference curve technique is merely “An old wine in new bottle.”

This technique is similar to the utility analysis because it merely gave new names to old terms. The concept of utility is replaced by scale of preference, tendency of diminishing marginal utility is replaced by diminishing marginal rate of substitution and cordinal numbers such as 1, 2, 3 etc., were labelled as ordinal numbers I, II, III, etc.

The conditions of equilibrium in both analysis are similar. According to utility analysis the consumer is in equilibrium when:

MUX / MUy = Px/ Py

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According to QC, equilibrium is given by:

MRSxy= Px/ Py

Where MRS xy = MUX / MUy

By substituting for MUx/ MUy MRSxy, we get

ADVERTISEMENTS:

MUx/ MUy = Px / Py

Therefore, conditions of equilibrium are similar in both the techniques.

But this criticism is untenable. Prof. Hicks claims, “The replacement of diminishing marginal rate of substitution is not mere translation.

It is a positive change in the theory of consumer demand.” We need not measure utility in fact to know the marginal rate of substitution. The consumer is simply asked to tell how much of if he gives to take an additional unit of X.

3. INDIFFERENCE CURVE IS NON-TRANSITIVE:
Prof. W.E. Armstrong has argued that a consumer is indifferent between close alternative combinations only because he is not able to perceive the difference between the two.

But as the difference of combinations increases, the difference in the satisfaction of different combinations becomes evident and so the different combinations on the same indifference curve do not yield equal satisfaction.
Thus, if Armstrong argument is accepted different points on an indifference curve give different satisfaction. The indifference curve will become non-transitive.

4. FAILS TO EXPLAIN RISKY CHOICE:
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.

To make a choice among uncertain alternatives quantitative measurement of utility is needed to decide whether the risk is worth taking. In such situations cordinal system of utility can explain consumer bahaviour.

5. ABSURD AND UNREALISTIC COMBINATIONS:
Indifference curve analysis is based on hypothetical combinations. When we consider different combinations of two goods, then there may be some combinations that are meaningless and cannot be possible in real life.

6. DOCS NOT PROVIDE BEHAVIOURISTIC EXPLANATION OF CONSUMER BEHAVIOUR:
The indifference map is hypothetical in nature and is not based on observed market behaviour. It is subjective in nature instead of objective.

The reason is that it does not set up functions and curves in purely objective terms. Purely objective indifference curves can be possible only if it is possible to obtain quantitative data.

The logical structure of indifference curve theory is such that it is difficult to quantity indifference curves. Though attempts have been made to quantity indifference curve but success is very limited.

7. BASED ON WEAK ORDERING:
Indifference curve analysis is based on the weak ordering hypothesis i.e., a consumer can be indifferent between a large number of combinations.

But, according to Prof. Samulson, it is not possible to find many situations of indifference in real world. The weak ordering makes it subjective in nature.
But ordinal analysis is certainly better than coordinal analysis as it is based on fewer assumptions.
2. WRITE SHORT NOTE ON BUDGET CONSTRAINT AND UTILITY MAXIMIZATION
 BUDGET CONSTRAINT
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you. For example, if you are a sales professional with a $1,000 budget for promotional items, this sets the upper limit on items you can purchase. The cost of each item and the minimum quantity you need would determine how many you can buy within your budget.
The same principle of budget constraint can also be applied to time. If you are a manager, your employees only have a certain number of hours in a workday, which means you need to determine how much of their time they should spend on the various things they need to accomplish. The calculation may vary from week to week as your business priorities change and your employees’ available time adjusts since some weeks include holidays or employees might take time off.
FORMULA
(P1 x Q1) + (P2 x Q2) = m
In this equation, P1 is the cost of the first item, P2 is the cost of the second item and m is the amount of money available. Q1 and Q2 represent the quantity of each item you are purchasing. You could express this equation verbally by saying that the cost of the total number of X items added to the cost of the total number of Y items must equal the amount of money or income you have available.
3. UTILITY MAXIMIZATION
Utility maximization is a strategic scheme whereby individuals and companies seek to achieve the highest level of satisfaction from their economic decisions. For example, when a company’s resources are limited, management will implement a plan of purchasing goods or services that provides the maximum benefit.
For example, if product ‘A’ comes with twice more marginal utility than product ‘B,’ that means product ‘A’ is providing more marginal utility per dollar than ‘B.’ As a result, the consumer may decide to buy more of product ‘A.’
The utility-maximizing rule is expressed as follows:
Utility Maximizing Rule
MUA/PA = MUB/PB where: MU is marginal utility and P is price
4. EXTENSIVELY DISCUSS THE COBWEB THEORY.
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
The cobweb model or cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of markets. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed.
ASSUMPTIONS OF COBWEB THEORY
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)

Name: Emmanuel patience N
Reg no: 2020/248472
faculty: vocational and technical education
Dpt: Business Education
Email: preciousemmanuel530@gmail.com

Answers
1: indifference curve is as the locus point representing different combination of two goods which yields equal utility to thr consumer so that the consumer is indifferent to the combination consumed
Assumptions
1) more of commodity is better than less
2) preference or indifference of a consumer are transitive
3) Diminishing marginal rate of substitution

criticism
it has been criticized for being the old wine in a bottle for it has merely rehashed the concept of diminishing marginal utility of product in new terms

2: budget constraint is the total amount of items one can afford within a current budget, it illustrate the range of choices available with the budget

utility maximization is the concept that individual and organizations seek to attain the highest level of satisfaction from their economic decisions

3: cobweb theory is the idea that price fluatuation can lead to fluatuation in supply which causes a cycle of rising and falling prices
Assumptions
it assumes there is an agricultural market where supply can vary due to variable factors such as weather.

1) INDIFFERENCE CURVE

An indifference curve is a curve showing combination of two goods that has the same level of satisfaction. Indifference curve has the concept of ordinal utility. An indifference curve is a graphical representation of a combined products that gives similar kind of satisfaction to a consumer thereby making them indifferent.Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility.

Indifference Curve Analysis
The indifference curve analysis work on a simple graph having two-dimensions. Each individual axis indicates a single type of economic goods. If the graph is on the curve or line, then it means that the consumer has no preference for any goods, because all the good has the same level of satisfaction or utility to the consumer. For instance, a child might be indifferent while having a toy, two comic book, four toy trucks and a single comic book.

PROPERTIES OF AN INDIFFERENCE CURVE
1. An indifference curve has a negative slope, i.e. it slopes downward from left to right.
Reason: If a consumer decides to have one more unit of a commodity
(say apples), quantity of another good (say oranges) must fall so that the total satisfaction (utility) remains same.

2. Indifference curve is strictly Convex to origin i.e. MRSxy is always diminishing
Reason: Due to the law of diminishing marginal utility a consumer is always willing to sacrifice lesser units of a commodity for every additional unit of another good.

3. Higher indifference curve represents higher levels of satisfaction when you combine two goods.

4. The slope of an indifference curve is also known as marginal rate of substitution.

5. Indifference curves can never touch or intersect.

ASSUMPTIONS OF THE INDIFFERENCE CURVE

1.The consumer’s indifference map for the two goods X and Y depends on his scale of preference.
2.There is no change in the taste and habit of the consumer through out the analysis.
3.The consumer is rational.
4.The goods are homogeneous and divisible.

CRITICISMS OF INDIFFERENCE CURVE.

(1) The Consumer is not Rational:
The indifference analysis, like the utility theory, assumes that the consumer acts rationally. He is of a calculating mind who carries innumerable combinations of different commodities in his head, can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods. This is too much to expect of the consumer who has to act under various social, economic and legal constraints.

(2) Combinations are not based on any Principle:
Since the combinations are made irrespective of the nature of goods, they often become absurd. How many of us buy 10 pairs of shoes and 8 pants, 6 radios and 5 watches or 4 scooters and 3 cars? Such combinations do not possess any significance for the consumer.

(3) Limited Analysis of Consumer’s Behaviour:
Further, the assumption that the consumer buys more units of the same good when its price falls is unwarranted. Leaving aside the case of inferior goods, he may not like to have more units of a good because he is under the influence of “conspicuous consumption” and wants to display or to have variety.

(4) Two-Goods Model Unrealistic:
Again, the two-goods model on which the indifference analysis is based makes the theory unrealistic because a consumer buys not two but a large number of commodities to satisfy his innumerable wants.

(5) Fails to Explain Consumer’s Behaviour in Choices Involving Risk or Uncertainty:
Another serious criticism levelled against the preference hypothesis is that it fails to explain consumer behaviour when the individual is faced with choices involving risk or uncertainty of expectations.

(6) Based on Unrealistic Assumption of Perfect Competition:
The indifference curve technique is based on the unrealistic assumptions of perfect competition and homogeneity of goods whereas, in reality, the consumer is confronted with differentiated products and monopolistic competition. Since the indifference hypothesis is based on unwarranted assumptions, it becomes unrealistic.

(7) All Commodities are not divisible

The indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units. Commodities like watches, cars, radios, etc. are indivisible. To have 3½ watches or 2½ cars or 1½ radios in any combination is unrealistic.

2) BUDGET CONSTRAINTS

Budget constraints occur as a result of scarcity and trade-offs. Scarcity is the concept that all resources are limited, such as time and money. Because resources are scarce, people must make trade-offs to efficiently allocate their resources while prioritizing their most important needs and wants. For example, say a household budget is 2,000 per month. Because the money is limited, the resource is scarce. Because there is only 2000 per month to cover expenses like rent and food as well as other wants, the household must make trade-offs to cover their most important needs. Most would consider rent and food to be a higher priority than going to the movies, so the family might decide to not go to the movies to be able to afford their rent and food.

A budget constraint refers to the maximum combined items one can afford with the income generated by the individual. Based on the money available each month, an individual must allocate their funds efficiently to purchase goods and services.

To conceptualize this in a simple way, imagine having only two items that can be purchased with the budget: hot dogs and t-shirts. The budget can be spent entirely on hot dogs, entirely on t-shirts, or some combination of both. The quantity of either good that can be purchased is determined by the price of the good, as well as the quantity purchased, and the price of the other good.

Budget Constraint Formula
A budget constraint in the example with only two goods can be expressed as follows:
(P1 x Q1) + (P2 x Q2) = M
Where P1 is the price of the first good, P2 is the price of the second good, Q1 is the quantity of the first good, Q2 is the quantity of the second good, and M is the money available. This equation illustrates that the quantities of goods 1 and 2 to be purchased are determined by the price and the constraints imposed by the money available.

If there are more goods to be purchased with the available money, the equation can be expanded to include as many goods and prices as needed.
A budget constraint graph is helpful to visualize which combinations of goods are affordable and which ones are not.

Utility maximization
Utility maximization refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions.
For example, when deciding how to spend a fixed amount, individuals will purchase the combination of goods/services that give the most satisfaction.

Utility maximization can also refer to other decisions – for example, the optimal number of hours for labour to supply their labour. Working more increases income, but reduces leisure time.

Utility maximisation is an important concept in classical economics. Early economists such as Alfred Marshall incorporated utility maximisation into economic theory.
An important assumption of classical economics is that the price consumers are willing to pay is a good approximation to the utility that they get from the good. If people are willing to pay 800 naira for a cup of ice cream, then this suggests the consumer must get a utility of at least 800 naira.

How individuals achieve utility maximisation
How much to consume?
A consumer will consume a good up to the point where the marginal utility is greater than or equal to the price.
If you feel a sandwich gives you more utility than the cost of buying then you will continue to buy.

When choosing between different goods, the Equi-Marginal principle argues that consumers will maximize total utility from their incomes by consuming that combination of goods where:

MUa = Pa
—– —-
MUb = Pb

Another way of showing utility maximisation is through the use of indifference curves and budget lines

Indifference curves show different combinations of goods which give the same utility.
A budget line shows disposable income and the maximum potential goods that can be bought
Indifference curves further to the right are more desirable as they have bigger combinations of goods.
Utility will be maximized at the furthest indifference curve still affordable.

Limitations of utility maximization

Ordinal utility. Ordinal utility states consumers find it hard to give exact values of utility, but they can order by preference – e.g. I prefer apples to bananas. This theory of ordinal utility was developed by John Hicks and gives less precise but rough guides to utility of consumers.

Irrational behaviour. Classical economics generally assumes individuals are rational and seek to maximise utility. However, in the real world, this may not be the case. Other factors affecting choice

Impulsive behaviour – buying goods which are later regretted.

3) COBWEB THEORY

Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.

Assumptions of Cobweb theory
In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be.

A key determinant of supply will be the price from the previous year.

A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.

Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
cobweb-theory

If there is a very good harvest, then supply will be greater than expected and this will cause a fall in price.
However, this fall in price may cause some farmers to go out of business. Next year farmers may be put off by the low price and produce something else. The consequence is that if we have one year of low prices, next year farmers reduce the supply.
If supply is reduced, then this will cause the price to rise.
If farmers see high prices (and high profits), then next year they are inclined to increase supply because that product is more profitable.
In theory, the market could fluctuate between high price and low price as suppliers respond to past prices.

Limitations of Cobweb theory

Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

NAME:CHUKWUEMEKA PRECIOUS MESSOMA
DEPARTMENT: ECONOMICS
REG NO:2020/242580

INDIFFERENCE CURVE:An indifference curve (IC) is a graphical representation of different combinations or consumption of two goods or commodities, providing equal levels of satisfaction and utility for the consumer. In other words, a consumer is considered indifferent between any two goods indicated by a point on the curve, provided these combinations give the same utility.
ASSUMPTIONS OF INDIFFERENCE CURVE
1)The consumer is rational to maximize the satisfaction and makes a transitive or consistent choice.
2)The consumer is expected to buy any of the two commodities in a combination.
3)Consumers can rank a combination of commodities based on their satisfaction levels. Usually, the combination with the higher satisfaction level is preferred.
4)The consumer behavior remains constant in the analysis.
5)The utility is expressed in terms of ordinal numbers.
CRITICISMS OF THE INDIFFERENCE CURVE
(1)Away from Reality:
With regard to the assertion that the indifference curve technique is superior to the cardinal utility analysis because it is based on fewer assumptions, Prof. Robertson observes: “The fact that the indifference hypothesis, the more complicated of the two psychologically, happens to be more economical logically, affords no guarantee that it is nearer to the truth.”
(2) Fails to Explain the Observed Behaviour of the Consumer:
Knight argues that the observed market behaviour of the consumer cannot be explained objectively. It is a mistake not to base the analysis of consumer’s demand on the cardinal utility theory. For instance, the income and substitution effects cannot be distinguished on the basis of mere observation.
(3) Indifference Curves are Non-transitive:
One of the greatest critics of the indifference hypothesis is W.E. Armstrong who argues that the consumer is indifferent not because he has complete knowledge of the various combinations available to him but because of his inability to judge the difference between alternative combinations. He further opines that any two points on an indifference curve are the points of indifference not because they are of iso-utility but of zero-utility difference.
(4) The Consumer is not Rational:
The indifference analysis, like the utility theory, assumes that the consumer acts rationally. He is of a calculating mind who carries innumerable combinations of different commodities in his head, can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods. This is too much to expect of the consumer who has to act under various social, economic and legal constraints
Budget Constraint
A budget constraint is an economic term referring to the combined amount of items you can afford within the amount of income available to you.
Example:If you have only #1000 to spend in a store to buy a coat, and you like two coats, one for #700 and one for #300 then you can only buy one. You have to choose between the two coats as the combined price of the two coats is greater than #1000.
Utility Maximization
Utility maximisation refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions.

For example, when deciding how to spend a fixed some, individuals will purchase the combination of goods/services that give the most satisfaction.It also refers to other decisions – for example, the optimal number of hours for labour to supply their labour. Working more increases income, but reduces leisure time.

Cobweb Theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
Assumptions of Cobweb theory
1)In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
2)A key determinant of supply will be the price from the previous year.
A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
3)Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)
Limitations of Cobweb theory
1)Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.

2)Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.

3)It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.

4)Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.

5)Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus

Name:Ani Emmanuella Ngozi
Reg no:2020/249748
Department:Business Education
Course :eco 201
1a) Indifference curve is the curve that represents all the combinations of goods that provides an equal level of utility or satisfaction.
b)ASSUMPTIONS OF INDIFFERENCE CURVE
-) The price of the two goods is given
-) An indifference curve is negative inclined sloping downward
-)The consumer taste habit and income remains the same throughout the analysis
-)The consumer acts rationally so as to maximize satisfaction
-)An indifference curve is always convex to the origin
C) CRITICISMS OF INDIFFERENCE CURVE
-) it is based on unrealistic assumption of rationality perfect, competition, division of goods or preference
-)indifference curve is criticized on the ground that it cannot explain consumer behavior
-)indifference curve is non transitive
-) indifference curve considers different combination of two goods, there may be some combination that is meaningless and cannot be possible in real life
2A)Budget constraint is an economic term referring to the combined amount of item you can afford within the amount of income available to you .
2B)Utility maximization describes the effort of the consumer to obtain the greatest degree of utility or value from a purchases, while keeping the cost of the purchase as low as possible
3) Cobweb theory is the idea that price fluctuations can lead to fluctuation in supply which cause a cycle of rising and falling price.
* cobweb theory of business cycle was propounded in 1930 independently by professor H Schultz of America,J.Tinbergen of the Netherlands and U. Riaci of Italy.But it was Prof Nicholas kaldo in 1934 that assume there is an agricultural market where supply can vary due to variable factor such as weather, he named it cobweb because of the pattern of movement of price and output resembled a cobweb.
IT’S ASSUMPTIONS
-) A key determine of supply will be the price from the previous year.
-) The parameters determining the supply function having constant value over a series of period
-)Current demand (D1) for the commodity is a function of current price (P1)
-) A low price will make some farmers to go out of business
-)The commodity under consideration is perishable and can be stored only for one year
CRITICISMS OF COBWEB THEORY
-) output not determined by price: the theory assumes that the output is determined by the price only. In reality, agricultural output in particular is determined by several other factors also such as weather, seeds, technology.
-)This is not strictly a trade cycle theorem it’s concerned only with the farming sector. It’s says nothing in other sphere of production.
-)Not Realistic:it is not realistic to assume that the demand and supply conditions remains unchanged over the previous and current period so that the demand and supply curves do not change .
-)Continuous cobweb impractical: critics point out that continuous cobweb is impractical because it cannot continue indefinitely. This is because producer incite more loss than profit from it.
IMPLICATIONS OF COBWEB THEORY
-)The cobweb model is an oversimplification of the real price determination process but it supplies new information to the market participants about market behavior.
-) it’s significance lies in the demand, supply and price behavior of a agricultural commodities.
-)Expectations about future conditions have an important influence on current price.
TYPES OF COBWEB THEORIES
Divergent cobweb model
Continuous cobweb model
Convergent cobweb model

The indifference curve analysis measures utility ordinally. It explains consumer behaviour in terms of his preferences or rankings for different combinations of two goods, say X and Y. An indifferent curve is drawn from the indifference schedule of the consumer. The latter shows the various combinations of the two commodities such that the consumer is indifferent to those combinations
ASSUMPTIONS
The consumer acts rationally so as to maximise satisfaction.
There are two goods X and Y
An indifference curve is smooth and continuous which means that the two goods are highly divisible and that level of satisfaction also change in a continuous manner.
CRITICISMS
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.

Cobweb theory is an economic model that explains why prices might be subject to periodic fluctuations in certain types of market.
In a simple cobweb model,we assume there is an agricultural market where supply can vary due to variable factors.
It concentrates attention on the important fact that the present events depend upon the past happenings.

Budget constraint is the boundary of the opportunity set all possible combinations of consumption that someone can afford given the prices of goods and services and the individuals income.
A budget constraint occurs when a consumer is limited in consumption patterns by a certain income.
Utility maximization is the concept that individuals and organizations seek to attain the highest level of satisfaction from their economic decisions.
It is an example of a consumer decides to purchase more of product A and less of product B because the combination guarantees more benefit.
In economics, utility theory governs individual decision making.

AMAEFULE RAPHEAL IZUCHUKWU
2020/246139
amaefulerapheal2002@gmail.com
ECO 201

(1) INDIFFERENCE CURVE
An indifference curve is the one which shows the possible combination of two commodities, each yielding the same satisfaction or utility to the consumer. All the combinations of two commodities represented on the indifference curve give the consumer the same amount of utility, such that he is “indifferent” as to which particular set of combination he prefers. Combination X will not give him more or less satisfaction than combination Y, as long as both combinations X and Y are on the same indifference curve. In other words, it does not matter to the consumer which combination he gets. If he gets combination X instead of Y, he will not feel any better off.

ASSUMPTIONS OF INDIFFERENCE CURVE
• The indifference curve cannot intersect, i.e, the curves can never cross each other since two indifference curves represent two different levels of satisfaction, which can never be equal.
• An indifference curve is always convex to the origin.
• An indifference curve is negatively inclined thus sloping downwards.
• The consumer acts rationally in order to maximise satisfaction.
• There are two goods, X and Y.
• The prices of the two goods are given.
• The consumer has knowledge of the prices of goods in the market.
• The consumer taste, habit and income remains constant throughout.

CRITICISMS OF INDIFFERENCE CURVE
• Indifference curve is non-transitive: Prof. W.E. Armstrong has argued that a consumer is indifferent between close alternative combinations only because he is not able to perceive the difference between the two. But as the difference of combinations increases, the difference in the satisfaction of different combinations becomes evident and so the different combinations on the same indifference curve do not yield equal satisfaction.
Thus, if Armstrong argument is accepted different points on an indifference curve give different satisfaction. The indifference curve will become non-transitive.
• Fails to explain risky choice: Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.To make a choice among uncertain alternatives quantitative measurement of utility is needed to decide whether the risk is worth taking. In such situations cordinal system of utility can explain consumer bahaviour.
• Absurd and unrealistic combinations:
Indifference curve analysis is based on hypothetical combinations. When we consider different combinations of two goods, then there may be some combinations that are meaningless and cannot be possible in real life.
• Does not provide behaviouristic explanation of consumer behaviour: The indifference map is hypothetical in nature and is not based on observed market behaviour. It is subjective in nature instead of objective. The reason is that it does not set up functions and curves in purely objective terms. Purely objective indifference curves can be possible only if it is possible to obtain quantitative data. The logical structure of indifference curve theory is such that it is difficult to quantity indifference curves. Though attempts have been made to quantity indifference curve but success is very limited.
• Based on weak ordering: Indifference curve analysis is based on the weak ordering hypothesis i.e., a consumer can be indifferent between a large number of combinations.
But, according to Prof. Samuelson, it is not possible to find many situations of indifference in real world. The weak ordering makes it subjective in nature. But ordinal analysis is certainly better than coordinal analysis as it is based on fewer assumptions.
• The Consumer is not Rational: The indifference analysis, like the utility theory, assumes that the consumer acts rationally. He is of a calculating mind who carries innumerable combinations of different commodities in his head, can substitute one for the other, compare their total utilities and make a rational choice between various combinations of goods. This is too much to expect of the consumer who has to act under various social, economic and legal constraints.
• Two-Goods Model Unrealistic: Again, the two-goods model on which the indifference analysis is based makes the theory unrealistic because a consumer buys not two but a large number of commodities to satisfy his innumerable wants. But the difficulty is that in the case of more than three goods geometry fails and economists will have to depend upon complicated mathematical solutions for analysing the problem of consumer behaviour.
• Based on Unrealistic Assumption of Perfect Competition: The indifference curve technique is based on the unrealistic assumptions of perfect competition and homogeneity of goods whereas, in reality, the consumer is confronted with differentiated products and monopolistic competition. Since the indifference hypothesis is based on unwarranted assumptions, it becomes unrealistic.
• All Commodities are not Divisible: The indifference curve analysis becomes ridiculous when it is assumed that goods are divisible in small units. Commodities like watches, cars, radios, etc. are indivisible. To have 3½ watches or 2½ cars or 1½ radios in any combination is unrealistic. When indivisible goods are taken in a combination, they cannot be substituted without dividing them. Thus the consumer cannot get maximum satisfaction from the use of indivisible goods.
Despite these criticisms, the indifference curve technique is still regarded superior to the Marshallian introspective cardinalism.

(2) BUDGET CONSTRAINT
The budget constraint is the boundary of the opportunity set—all possible combinations of consumption that someone can afford given the prices of goods and the individual’s income. Budget constraint constitutes the primary part of the concept of utility maximization.
The slope of the budget constraint is determined by the relative price of the choices. Choices beyond the budget constraint are not affordable.
A budget constraint is linear with a slope equal to the negative ratio of the prices of the two goods in combination.

UNDERSTANDING BUDGET CONSTRAINTS
One way for us to better understand budget constraints is to build an equation. Let’s make P and Q the price and quantity of items purchased and budget the amount of income one has to spend.
Budget = P1 × Q2 + P2 × Q2
​
Recall that MRS is the slope of the indifference curve, and Px/Py is the slope of the budget line. This means that if the slope of the indifference curve is steeper than that of the budget line, the consumer will consume more X and less Y.
The concept of budget constraint doesn’t account for sunk costs. Sunk costs are costs already received in the past that can’t be changed in the present. When you’re working with the budget constraint framework, you’re not expected to consider sunk costs as part of the present economic decision. For instance, if you spend money on a ski trip, and then realize that you hate skiing once you’ve already paid for it, the cost of the trip is now a sunk cost. You might finish the ski trip (e.g., spend the three more days left) to feel like you haven’t wasted your money. But here’s the problem: now you’re paying an opportunity cost by spending those three days doing something you hate instead of something you enjoy.

UTILITY MAXIMISATION
A consumer would want to achieve the greatest amount of satisfaction from the limited resources available to him. He can maximise total utility by reducing his expenditure on certain commodities whose increased consumption yields low satisfaction and increase expenditure on others which give him higher level of satisfaction. Thus, Utility maximisation requires that the ratio of marginal utilities of the last units of the commodities should be equal to the ratio of the prices. At this point, marginal utility is equal to zero.

Thus, MUx = Price x =0

Alternatively, a consumer’s utility is maximised when the marginal utility per amount spent on a product is equal to the marginal utility per amount spent on any other product.

(3) COBWEB THEORY
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather. It describes cyclical supply and demand in a market where the amount produced must be chosen before prices are observed. Producers’ expectations about prices are assumed to be based on observations of previous prices. Nicholas Kaldor analyzed the model in 1934, coining the term “cobweb theorem” (see Kaldor, 1938 and Pashigian, 2008), citing previous analyses in German by Henry Schultz and Umberto Ricci.

ASSUMPTIONS Of COBWEB Theory
• In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
• A key determinant of supply will be the price from the previous year.
• A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
• Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand).

COBWEB THEORY AND PRICE DIVERGENCE
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point).
If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.

COBWEB THEORY AND PRICE CONVERGENCE
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium.

EXAMPLE OF COBWEB THEORY
Housing: Housing is very inelastic and subject to booms and bust. In response to the housing boom in Ireland, supply increased. But, the price collapsed, leading to a big fall in the building of new housing. Tamari, (1981) argued there was evidence of cobweb nature of the Israeli housing market.

LIMITATIONS OF COBWEB THEORY
• Rational expectations: The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.
• Price divergence is unrealistic and not empirically seen: The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.
• It may not be easy or desirable to switch supply: A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.
• Factors affecting price: There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.
• Buffer stock schemes: Governments or producers could band together to limit price volatility by buying surplus.

Asogwa Arinze Godwin
2016/235173
Godwintej@gmail.com
ECO 201

1• An indifference curve is a curve that represents all the combinations of goods that give the same satisfaction to the consumer. Since all the combinations give the same amount of satisfaction, the consumer prefers them equally. Hence the name indifference curve.

Assumptions of Indifference Curve
•The consumer is rational. Also, he possesses full information about all the relevant aspects of the economic environment in which he lives.
•The consumer can rank combination of goods based on the satisfaction they yield. However, he can’t quantitatively express how much he prefers a certain good over the other.
•If a consumer prefers A over B and B over C, then he prefers A over C.
•If a combination X has more commodities than the combination Y, then X is preferred over Y.

Criticisms of Indifference Curve
• Consumer preferences can change substantially over time, making accurate indifference curves obsolete.
•Fails to explain risky choice.
•Based on weak ordering.
•Consumer is not rational.
•Based on two goods.

(2)Budget Constraint
The budget constraint is the set of all the bundles a consumer can afford given that consumer’s income. We assume that the consumer has a budget—an amount of money available to spend on bundles. For now, we do not worry about where this money or income comes from; we just assume a consumer has a budget.
Budget constraints can change due to changes in prices and income, but let’s now consider other common features of the real-world market that can affect the budget constraint. We start with coupons or other methods firms use to give discounts to consumers.

Utility Maximisation
Utility maximisation refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions.
For example, when deciding how to spend a fixed some, individuals will purchase the combination of goods/services that give the most satisfaction.
Utility maximisation can also refer to other decisions – for example, the optimal number of hours for labour to supply their labour. Working more increases income, but reduces leisure time.
It is thus expressed as MUx = Px

(3)COBWEB THEORY
The Cobweb Theorem attempts to explain the regularly recurring cycles in the output and prices of farm products. Frankly speaking, it is not a business cycle theory for it relates only to the farming sector of the economy. In 1930 Cobweb Theory was advanced by the three economists in Italy.
Netherlands and the United States, apparently independently of each other almost at the same time. The names of Henery Schultz. (U.S.A.), Jam Tinbergen (Netherland) and Althus Hanau (Italy) are associated with’ the theory, although the term Cobweb Theory was first suggested by Professor Nicholas Kaldor 1934.

This theorem is based on three assumptions:
(i) Perfect competition in which each producer assumes that present prices will continue and that his own production plans will not affect the market,
(ii) Price is completely a function of the preceding period’s supply
(iii) The commodity concerned is perishable. These assumptions show that the theory is particularly applicable to agricultural products.

DIVISIONS OF COBWEB
1) Continuous Cobwebs,

(2) Divergent Cobwebs, and

(3) Convergent Cobwebs.

In the case of continuous Cobweb the fluctuations in price and output continues repeating about equilibrium at same level. In the case of diverging Cobweb the amplitude of the fluctuation increases with the passage of time. Once disturbed from position of equilibrium the economy moves cumulatively away from it into the doledrums of disequilibrium.
This happens when the slope of the supply curve is less steep than the slops of demand curve. In the case of converging cobweb the economy, if and when disturbed from its equilibrium position, has a tendency to regain it through a series of oscillations. Each fluctuation is more damped than the one preceding it. This narrowing down of the amplitude of the fluctuations occurs when the slope of the supply curve is steeper than the slope of demand curve.

Criticism of Cobweb Theory:
Like all other theories of trade cycle, the Cobweb Theory too suffers from some severe limitations:
(1) This is not strictly a trade cycle theorem for it is concerned only with the farming sector. There are a good many others sphere of production where it says nothing.
(2) This theorem assumes that the output is solely governed by price. Thus is unrealistic assumption. The fact is that the output particularly of farm products is determined not only by price, but by several other factors—weather, prices of the factors of production.
(3)It is applicable only where:
(a) The price is governed by the supply available,
(b) When production is governed only by the considerations of price as wider perfect competition, and
(c) When production cannot vary before the expiry of one full period.

Question 1
The indifference curve in economics, shows the various combinations of two things (usually consumer goods) that yield equal satisfaction or utility to an individual. This concept was Developed by the Irish-born British economist Francis Y. Edgeworth, it is widely used as an analytical tool in the study of consumer behaviour, particularly as related to consumer demand. It is also utilized in welfare economics, a field that focuses on the effect of different actions on individual and general well-being.
Assumptions of the indifference curve
1. The consumer acts rational so as to maximize satisfaction.
2. There are two goods X and Y.
3. The consumer possess complete information of the price of good in the market.
4. The price of the two goods are given.
5. The consumer taste,habit ,income remains thesame throughout the analysis.
6. He prefers more of X and less of Y and vice versa.
7.An indifference curve is always convex to the origin.
8. An indifference curve is negatively inclined, sloping downward.
9. Goods are arranged in a scale of preference.
10. The indifference curve is transitive in nature.
The criticisms of an indifference curve
1. Unrealistic assumptions:
It is based on unrealistic assumptions of rationality, perfect competition, divisibility of goods and perfect knowledge of scale or preference.
2. No novelty:
Prof. D.H. Robertson remarked that the indifference curve technique is merely “An old wine in new bottle.”

This technique is similar to the utility analysis because it merely gave new names to old terms. The concept of utility is replaced by scale of preference, tendency of diminishing marginal utility is replaced by diminishing marginal rate of substitution and cordinal numbers such as 1, 2, 3 etc., were labelled as ordinal numbers I, II, III, etc.

The conditions of equilibrium in both analysis are similar. According to utility analysis the consumer is in equilibrium when:
3. Indifference curve is non-transitive:
Prof. W.E. Armstrong has argued that a consumer is indifferent between close alternative combinations only because he is not able to perceive the difference between the two.
4. Fails to explain risky choice:
Indifference curve analysis is criticized on the ground that it cannot explain consumer behaviour when he has to choose among alternatives involving risk or uncertainty of expectation.
To make a choice among uncertain alternatives quantitative measurement of utility is needed to decide whether the risk is worth taking. In such situations cordinal system of utility can explain consumer bahaviour.
5. Absurd and unrealistic combinations:
Indifference curve analysis is based on hypothetical combinations. When we consider different combinations of two goods, then there may be some combinations that are meaningless and cannot be possible in real life.
6. Docs not provide behaviouristic explanation of consumer behaviour:
The indifference map is hypothetical in nature and is not based on observed market behaviour. It is subjective in nature instead of objective.
The reason is that it does not set up functions and curves in purely objective terms. Purely objective indifference curves can be possible only if it is possible to obtain quantitative data.
The logical structure of indifference curve theory is such that it is difficult to quantity indifference curves. Though attempts have been made to quantity indifference curve but success is very limited.
7. Based on weak ordering:
Indifference curve analysis is based on the weak ordering hypothesis i.e., a consumer can be indifferent between a large number of combinations.
But, according to Prof. Samulson, it is not possible to find many situations of indifference in real world. The weak ordering makes it subjective in nature.

Question 2
Budject constraint
The budget constraint is the set of all the bundles a consumer can afford given the consumer’s income. We assume that the consumer has a budget—an amount of money available to spend on bundles.
So what a consumer can afford largely depends on the prices of the goods in question.
Algebraically, budject constraint can be written as p1x1+p2x2 ≤ M.
Where P represents the price of the goods and X representing the consumer bundle.

Utility maximization
This is also known as consumer equilibrium.
Utility maximization is a point where a consumer derives maximum satisfaction when his marginal utility is equals to zero.
Thus; MUx= Price x=0.
More so, utility maximization is the attainment of the greatest possible total utility. As consumers tries to attain maximum satisfaction, they are constrained by the available income and prices of the goods .

Question 3
Cobwebs theory
Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.

In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
Assumptions of Cobweb theory
1. In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
2. A key determinant of supply will be the price from the previous year.
3. A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
4. Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand).

Limitations of Cobweb theory
1. Rational expectations. The model assumes farmers base next years supply purely on the previous price and assume that next year’s price will be the same as last year (adaptive expectations). However, that rarely applies in the real world. Farmers are more likely to see it as a ‘good’ year or ‘bad year and learn from price volatility.
2. Price divergence is unrealistic and not empirically seen. The idea that farmers only base supply on last year’s price means, in theory, prices could increasingly diverge, but farmers would learn from this and pre-empt changes in price.
It may not be easy or desirable to switch supply. A potato grower may concentrate on potatoes because that is his speciality. It is not easy to give up potatoes and take to aubergines.
3. Other factors affecting price. There are many other factors affecting price than a farmers decision to supply. In global markets, supply fluctuations will be minimized by the role of importing from abroad. Also, demand may vary. Also, supply can vary due to weather factors.
4. Buffer stock schemes. Governments or producers could band together to limit price volatility by buying surplus.

Cobweb theory and price divergence
Price will diverge from the equilibrium when the supply curve is more elastic than the demand curve, (at the equilibrium point).
If the slope of the supply curve is less than the demand curve, then the price changes could become magnified and the market more unstable.

Cobweb theory and price convergence
At the equilibrium point, if the demand curve is more elastic than the supply curve, we get the price volatility falling, and the price will converge on the equilibrium.