ECO 211-Tutorial Set 1 session 2023-24

UNIVERSITY OF BOTSWANA
DEPARTMENT OF ECONOMICS

ECO211 TUTORIAL SET 1 2023-2024

QUESTION 1

a) With the aid of appropriate diagrams, discuss the three properties of indifference
curves.
b) Draw the indifference curves for substitute goods and complementary goods.

QUESTION 2

Discuss the three assumptions of revealed preference.

QUESTION 3

Define the marginal rate of substitution. Given that good M is on the horizontal axis and N
on the vertical axis, use a suitable diagram to explain how the marginal rate of substitution
of good M for good N changes along a convex indifference curve.

QUESTION 4

State the law of diminishing marginal utility. Mathematically show the relationship between
the marginal rate of substitution of good X for Y and the slope of the indifference curve.

QUESTION 5

An individual’s total utility for coke is as follows: TU=64c-4c2

a) Graph the total utility function, and explain the nature of the individual’s utility for
coke.
b) Calculate the equation for marginal utility and illustrate it graphically.
c) At what level of consumption will utility be maximised?
d) How much will total utility be at a consumption of 10 units?
e) Calculate marginal utility when the consumption is 10 units.
f) Is law of diminishing marginal utility is satisfied in this case?

QUESTION 6

If Thato’s marginal rate of substitution of beans (B) for chocolate (C) equals C/B regardless
of which indifference curve point (B,C) she is on, how many kilograms of beans and
chocolate does Thato buy if her income is P100 and prices are P B=P6/kg and PC=P1.50/kg?

QUESTION 7

Given the following utility function: U(H,C)=H2C

And the budget constraint as: E=PHH+PCC

a) Set up the Lagrangian function.

1|Page
ECO 211-Tutorial Set 1 session 2023-24

b) Derive the first order conditions for maximization.

c) Obtain the utility maximizing quantities of goods H and C.

d) Now, suppose that the information above represents consumption by the Ministry of
Health, where H is hospitals (on the Y-axis) and C is clinics (on the X-axis). If the
Ministry received P40 million for the 2018/19 financial year to build new public
hospitals and clinics, both of which are needed to improve the health needs of the
population, what are the optimal quantities of hospitals and clinics that the Ministry
should build, if each hospital costs P5 million and each clinic, P2 million?

e) Use a clearly labeled diagram to aid in your answer.

QUESTION 8

Suppose the consumer has the marginal utilities of commodities rice (R) and beans (B) are
respectively; MUR=60-2R and MUB=140-4B
Let PR = 2 and PB = 4 and consumers’ income I = 164 .

a) Plot the budget line.

b) State the condition for consumer equilibrium.
c) Compute the optimal quantities of R and B demanded.

QUESTION 9

Tebogo’s utility function for food (F) and shelter (S) is given by: U (F,S)=200F0.5S0.5

a) If the unit commodity prices for food and shelter are respectively, PF=80 and
PS=P120, plot the budget line if she has only P960 to spend.
b) Find the marginal rate of substitution.
c) Advice on how Tebogo could maximise her utility from consumption of the two
goods.
d) Calculate the quantities demanded for cars and houses.

QUESTION 10

A consumer’s marginal rate of substitution of good X for good Y is given as

regardless of which indifference curve he is on.

a) Plot the budget line if PX = 16; PY = 2 and M = P68, where PX and PY are prices of
goods X and Y respectively and M is the consumer’s money income.
b) Find the optimal quantities of goods X and Y
c) Graphically illustrate and explain the answer in part b) above.

2|Page
ECO 211-Tutorial Set 1 session 2023-24

QUESTION 11

A consumer’s utility function, defined over two goods X and Y yields the following marginal
utilities: MUX=30-X and MUY=66-2Y.

Let the prices be PX=4 and PY=8, and the consumer’s income be I=48.

a) Plot the budget line.

b) Find the optimum quantities of X and Y for the consumer.
c) Suppose that the consumer’s income is reduced to I=P24, plot the budget line and
find the new optimum quantities.
d) Graphically illustrate and explain your answer in b) above.

QUESTION 12

What conditions characterize consumer optimum? State and explain these in three different
ways.

QUESTION 13

Suppose that M and N are normal goods. Using appropriate diagrams,

a) Derive the demand curve for good M.

b) Derive the Engel curve for good M.
c) If good M was an inferior good, how would your answer in b) above be different?

QUESTION 14

a) Compare and contrast the income and substitution effects for a normal good and
inferior good.
b) Graphically illustrate and explain the total effect, the income effect and the
substitution effect of a price increase for:
i. A normal good.
ii. An inferior good.

QUESTION 15

a) Discuss the three characteristics of a Giffen good.

b) Graphically analyse and discuss the total effect of a price decrease on the quantity
demanded for a Giffen good.

QUESTION 16

Given the demand function: Q=60-4P

Calculate and interpret the price elasticity of demand at price (i) P5 (ii) P10

3|Page
ECO 211-Tutorial Set 1 session 2023-24

QUESTION 17

Define, write brief notes and illustrate the following concepts:

a) Indifference curves
b) Budget constraint
c) Income-consumption curve
d) Price consumption curve
e) Substitutes and Complements
f) Price elasticity of demand
g) Income elasticity of demand.
h) Condition for Consumer equilibrium

QUESTION 18

Explain the concept of consumer surplus and then illustrate the following:

a) The measurement of consumer surplus.

b) The change in consumer surplus following:
i. A price increase
ii. A price decrease.

QUESTION 19

a) Explain the concepts of price, cross price and income elasticity of demand.
b) What factors determine the price elasticity of demand? Explain.

QUESTION 20

Discuss the nature of demand curve with examples and with graphs for each of the
following cases

a) Perfectly inelastic good

b) Perfectly elastic good

Label the axis in each case.

QUESTION 21

The price of product X decreases from Pula 3000 to Pula 2500 and as a result the market
demand for the product Y increases from 200 000 units to 230000.Calculate the cross price
elasticity and interpret the result.

QUESTION 22

The average income per house hold in Gabane has increased from Pula 100000 to Pula
110000 per month .As a result the market demand for the product Y increases from 150 per
day to 160 per day .Calculate the income elasticity and interpret the result.

4|Page