Question
1. Explain the concept of the law of diminishing marginal utility. Use graph to support your explanation.2. Suppose that the price of a cake is
1. Explain the concept of the law of diminishing marginal utility. Use graph to support your explanation.2. Suppose that the price of a cake is Rp 5.000 while the price of gasoline is Rp 20.000 per litter. It is also known that the Joe's monthly income is Rp 1.000.000, which he may use to buy cakes and gasoline.a. Based on the information above, draw a Joe's budget constraint. If it is further assumed that he will allocate his income equally between buying cakes and gasoline. Calculate the amount of cakes and gasoline that Joe will be able to purchase each month. Draw consumer's equilibrium! (hints : use indifference curve) b. Suppose his income has increased to Rp. 2.000.000. Draw the new budget constraint and explain how it changes.c. Given the new budget constraint of Rp 2.000.000, if there is a decrease in the price of gasoline to Rp. 10.000 per litter, calculate the amount of cakes and gasoline that Joe will be able to purchase each month. Explain and draw new consumer's equilibrium! (hints : use indifference curve)
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