ECS2601
Assignment 1 Semester 1 2025
Unique #:655050
Due Date: 2 April 2025
Detailed solutions, explanations, workings
and references.
+27 81 278 3372
, QUESTION 1
1.1
In microeconomics, we assume that consumers make decisions based on three
key assumptions. Here are real-life examples to explain them:
1. Consumers have needs and express them as preferences for goods
and services:
o Example: A person who enjoys coffee may prefer a specific brand of
coffee over others due to taste or quality. This preference reflects
their need for caffeine or enjoyment.
2. Consumers face budget constraints:
o Example: A student may want a high-end laptop for gaming and
studying but chooses a mid-range laptop due to a limited budget.
Their purchasing decision is influenced by financial constraints.
3. Consumers aim to maximize satisfaction within their budget:
o Example: When grocery shopping, a family may buy store-brand
cereal instead of a name-brand one if it offers similar quality at a
lower price. This choice maximizes satisfaction while staying within
budget.
1.2.
The marginal rate of substitution (MRS) between two goods must equal the ratio
of their prices for a consumer to achieve maximum satisfaction.
MRS measures the amount of one good a consumer is willing to give up for
another while maintaining the same level of satisfaction. The price ratio (PX/PY)
represents how much of one good must be sacrificed to afford another.
If MRS > Price Ratio: The consumer values one good more than its market cost
and should buy more of it.
If MRS < Price Ratio: The consumer values the good less than its market cost
and should buy less of it.
If MRS = Price Ratio: The consumer has allocated resources efficiently, achieving
maximum satisfaction.
Varsity Cube 2024 +27 81 278 3372
Assignment 1 Semester 1 2025
Unique #:655050
Due Date: 2 April 2025
Detailed solutions, explanations, workings
and references.
+27 81 278 3372
, QUESTION 1
1.1
In microeconomics, we assume that consumers make decisions based on three
key assumptions. Here are real-life examples to explain them:
1. Consumers have needs and express them as preferences for goods
and services:
o Example: A person who enjoys coffee may prefer a specific brand of
coffee over others due to taste or quality. This preference reflects
their need for caffeine or enjoyment.
2. Consumers face budget constraints:
o Example: A student may want a high-end laptop for gaming and
studying but chooses a mid-range laptop due to a limited budget.
Their purchasing decision is influenced by financial constraints.
3. Consumers aim to maximize satisfaction within their budget:
o Example: When grocery shopping, a family may buy store-brand
cereal instead of a name-brand one if it offers similar quality at a
lower price. This choice maximizes satisfaction while staying within
budget.
1.2.
The marginal rate of substitution (MRS) between two goods must equal the ratio
of their prices for a consumer to achieve maximum satisfaction.
MRS measures the amount of one good a consumer is willing to give up for
another while maintaining the same level of satisfaction. The price ratio (PX/PY)
represents how much of one good must be sacrificed to afford another.
If MRS > Price Ratio: The consumer values one good more than its market cost
and should buy more of it.
If MRS < Price Ratio: The consumer values the good less than its market cost
and should buy less of it.
If MRS = Price Ratio: The consumer has allocated resources efficiently, achieving
maximum satisfaction.
Varsity Cube 2024 +27 81 278 3372
