ECO 111 TUTORIAL 3

Chapter 6 & 8

SECTION A

(15 MARKS)

QUESTION 1

As more and more units of a good are consumed by a household, the total utility gained from that good
will:

A. diminish.
B. increase, but by successively smaller amounts.
C. rise steeply.
D. remain unchanged.

QUESTION2

Which one of the following statements is correct?

A. A consumer is in equilibrium when his or her average utility is at a maximum.

B.A consumer is in equilibrium when his or her marginal utility is at a maximum.
C. A consumer is in equilibrium when his or her weighted marginal utility is at a maximum.
D. A consumer is in equilibrium when the marginal utilities per rand spent are equal for all goods
purchased.
E.It is possible to compare the utility derived by two individual consumers from the consumption of
a particular good (eg ice cream).

QUESTION 3

Which of the following is a feature of utility?

A. Utility can be measured.

 B. Utility always rises at a constant rate.
C. When consuming the same good, utility varies across individuals.
D. Utility is a measure of satisfaction gained from producing a good.
E. When consuming the same good, utility is constant across individuals.

QUESTION 4

The price of coffee is R20 per cup, the price of Red Bull is R30 per unit and income is R120. What is the
consumer’s equilibrium position, assuming that the entire income is spent on coffee and Red Bull?

A. 1 unit of coffee and 3 units of Red Bull

B. 3 units of coffee and 2 units of Red Bull.

C. 6 units of coffee and 0 units of Red Bull.

D. 2 units of coffee and 4 units of Red Bull.

E. 3 units of coffee and 4 units of Red Bull.

QUESTION 5

The total utility gained from consuming additional units of a good will increase if:

A. the opportunity cost of consuming rises.

B. marginal utility is zero.
C. marginal utility is positive.
D. marginal utility is negative.
E. expenditure on the good falls.

QUESTION 6

Which one of the following is required for a consumer to experience diminishing marginal utility when
consuming a good?

A. The consumer must be wealthy.

B. Units of the good must be consumed over a specified period.

C. The good must be edible.

D. The first unit consumed must yield a very high marginal utility.
 E. There are no specific requirements for the law to operate.

QUESTION 7

Which one of the following statements is incorrect?

A. When a total value decreases, it implies that the corresponding marginal value is negative.

B. To derive consumer equilibrium, both the prices of the products and the consumer’s income have
to be taken into account.

C. A consumer is in equilibrium when his marginal utility is at a maximum.

D. A consumer who spends her income on four products is in equilibrium when the weighted
marginal utilities of a combination of the products that she can afford to purchase are equal.

E. When a marginal value is positive and greater than the preceding average value, the average
value rises.

QUESTION 8

Make use of the data in the table below and answer question 8a ,9 and question 10.

Units Total utility Total utility Total utility

(kg) of apples of bananas of oranges

(utils) (utils) (utils)

1 120 64 100

2 188 94 144

3 226 119 180

4 256 134 210

5 280 144 234

Question (a)
 Suppose John has R100 available to spend on apples, bananas and oranges and that each of these
product’s cost R10 per kilogram. If John spends the full R100 on these products, he will be in
equilibrium if he buys:

A. 5 kg apples, 3 kg bananas and 5 kg oranges.

B. 4 kg apples, 2 kg bananas and 4 kg oranges.

C. 3 kg apples, 5 kg bananas and 2 kg oranges.

D. 2 kg apples, 4 kg bananas and 4 kg oranges.

E. 5 kg apples, 5 kg bananas and 5 kg oranges.

Question 9

At equilibrium John’s total utility will be:

A. 633 utils.

B. 560 utils.

C. 504 utils.

D. 532 utils.

E. 658 utils.

Question 10

If the price of bananas decreases to R5 per kg while the other prices and John’s income remain
the same, John will be in equilibrium if he uses the R100 to buy:

A. 4 kg apples, 2 kg bananas and 4 kg oranges.

B. 4 kg apples, 4 kg bananas and 4 kg oranges.

C. 5 kg apples, 4 kg bananas and 3 kg oranges.

D. 3 kg apples, 4 kg bananas and 5 kg oranges.

E. 5 kg apples, 5 kg bananas and 5 kg oranges.

 Question 11

Which one of the following statements about indifference curves is false?

A. They connect points of equal utility to the consumer.

B. The indifference curve that lies furthest from the origin indicates the greatest level of consumer
satisfaction.
C.When two indifference curves cross, the one that ends on the right-hand side indicates the greatest
level of consumer satisfaction.
D. Indifference curve analysis can be used to derive predictions about the impact on quantity
demanded of changes in consumer incomes.

Question 12

Which one of the following statements about indifference curves is false?

A. They connect points of equal utility to the consumer.

B. The indifference curve that lies furthest from the origin indicates the greatest level of consumer
satisfaction.
C.When two indifference curves cross, the one that ends on the right-hand side indicates the greatest
level of consumer satisfaction.
D. Indifference curve analysis can be used to derive predictions about the impact on quantity
demanded of changes in consumer incomes.

Question 13

Indifference curves are convex to the origin because of:

A. the transitivity of consumer preferences.

B. The law of substitution.
C. the assumption of non-satiation.
D. the assumption of completeness.
E. the assumption of consistency.

Question 14

The assumption of consistent (transitive) preferences implies that indifference curves must:
 A. not cross one another.
B. have a positive slope.
C. be L-shaped.
D. be convex to the origin.
E. All of the above statements are true.

Question 15

Which of the following statements concerning the slope of an indifference curve is false?

A. It is referred to as the marginal rate of substitution.

B. It is equal to the ratio of the marginal utilities of the goods.

C. It is equal to the ratio of the prices of the goods.

D. It has a negative slope.

SECTION B

QUESTION 1 (6 Marks)

Prove that the utility approach and the indifference curve approach yield the same consumer equilibrium.
QUESTION 2 (4 marks)

If you were the Minister of Finance and you wanted to raise revenue by taxing a specific good, would you
tax a good of which the price elasticity of demand is high or one of which the price elasticity of demand is
low? Explain.