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Tutorial 2 SECTION D (T1 2020)

The document is a tutorial on consumer welfare and consumer utility. It contains two sections. Section 1 contains questions about consumer surplus, producer surplus, price floors, price ceilings, and subsidies. Section 2 contains multiple choice questions about marginal utility, the law of diminishing marginal utility, indifference curves, and utility maximization. The document provides information to understand concepts in microeconomics related to consumer behavior and welfare analysis.

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jaiveer gurjar
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61 views

Tutorial 2 SECTION D (T1 2020)

The document is a tutorial on consumer welfare and consumer utility. It contains two sections. Section 1 contains questions about consumer surplus, producer surplus, price floors, price ceilings, and subsidies. Section 2 contains multiple choice questions about marginal utility, the law of diminishing marginal utility, indifference curves, and utility maximization. The document provides information to understand concepts in microeconomics related to consumer behavior and welfare analysis.

Uploaded by

jaiveer gurjar
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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TUTORIAL 2
SECTION D (T1 2020)

SECTION 1: Consumer Welfare


1. Refer to the graph below and mark the following areas:

a. Consumer surplus at price P. BPL


b. Producer surplus at price P. PRL
c. The loss of consumer surplus if price rises from P to A. AKLP
d. The change in producer surplus if price rises to A. AKMN
e. The economic welfare to society at price P. RBL
f. The net loss of economic welfare to society if the price rises from P to A. KLM
g. Suppose the AKNM is the tax revenue for the government, due to a sales tax on the
product. What is the CS, PS, TS and DWL in this case? BAK, RNM, AKNM, KLM

2. What happens to equilibrium supply and demand if a price floor is set below the
equilibrium price? NO EFFECT

3. What happens to producer surplus when a price ceiling (below the equilibrium price)
is enacted? What happens to consumer surplus? Will there be a shortage or a surplus
in the new equilibrium? Shortage

4. The UK Government has decided to give subsidized housing to all corona-warriors.


The following graph illustrates the situation.
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Use this graph to highlight the net change in welfare to the society.
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SECTION 2: Consumer Utility

1. Which of the following defines marginal utility?


A) the change in total utility divided by the price of a product
B) the maximum amount of satisfaction from consuming a product
C) the total satisfaction received from consuming as much of the product that is available for
consumption
D) the additional satisfaction received from consuming one more unit of a product

2. Which best expresses the law of diminishing marginal utility?


A) The more consumption of a product, the smaller is the total and marginal utility from the
consumption.
B) The less consumption of a product, the greater is the total and marginal utility of the
consumption.
C) The more consumption of a product, the smaller is the marginal utility from consuming an
additional unit.
D) The more consumption of a product, the smaller is the total and marginal utility from the
consumption.

3. As a child, I hated spinach. After studying Economics, I can say that my marginal utility of
spinach is:
A) zero.
B) positive, but decreasing.
C) negative.
D) less than the total utility.

4. When marginal utility is decreasing but positive, total utility is:


A) increasing at a decreasing rate.
B) increasing at an increasing rate.
C) decreasing at a decreasing rate.
D) decreasing at an increasing rate.

5. A consumer with a fixed income will maximize utility when each good is purchased in
amounts such that the:
A) total utility is the same for each good.
B) marginal utility of each good is maximized.
C) marginal utility per dollar spent is the same for all goods.
D) marginal utility per dollar spent is maximized for each good.

6. If a rational consumer is in equilibrium, then:


A) the marginal utility obtained from one product is equal to the marginal utility obtained
from any other product.
B) a reallocation of income would increase the consumer's total utility.
C) the marginal utility per last dollar spent is the same for all goods consumed.
D) total utility becomes zero.
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7. If you know that the marginal utility per dollar spent on product Alpha is less than the
marginal utility per dollar spent on product Beta, consumers who spend all their income on
these two products can:
A) maximize total utility but not marginal utility.
B) maximize marginal utility but not total utility.
C) increase total utility by buying more of Beta and less of Alpha.
D) increase total utility by buying more of Alpha and less of Beta.

8. A consumer is in equilibrium and is spending income in such a way that the marginal
utility of product X is 40 units and Y is 16 units. The unit price of X is $5. The price of Y is:
A) $1 per unit.
B) $2 per unit.
C) $3 per unit.
D) $4 per unit

9. Indifference curves are convex to the origin because:


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10. Interpret the following shifts in the budget line:

11. As a consumer moves away from the origin onto higher indifference curves, what
happens?
A) The consumer reaches less preferred combinations of goods.
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B) The consumer reaches more affordable combinations of goods.


C) The consumer reaches more preferred combinations of goods.
D) None of the above because it is impossible to move from one indifference curve to
another.

12. We have asked Mark to rank his preferences between three market baskets, A, B, and C.
If Mac prefers B to C but does not care if he gets A or B, then
A) A is on a higher indifference curve than B.
B) B is on a higher indifference curve than C but it is not possible to determine whether C is
on a higher, lower, or the same indifference curve as A.
C) C is on a higher indifference curve than A.
D) Both A and B are on a higher indifference curve than C.

13. Moving along an indifference curve, if a consumer requires 1 unit of the good measured
along the y-axis to make up for 5 unit less of the good measured on the x-axis, then
A) the marginal rate of substitution is high and the indifference curve is steep.
B) the marginal rate of substitution is high and the indifference curve is relatively flat.
C) the marginal rate of substitution is low and the indifference curve is relatively flat
D) the marginal rate of substitution is low and the indifference curve is steep.

14. Suppose a consumer has utility function for goods X and Y given by U(X,Y)= X0.4Y0.6

a. What is the consumer’s marginal utility for X? What is his marginal utility for Y?
b. Suppose the price of X is equal to 2 and the price of Y equal to 6. What is the utility
maximizing consumption of X and Y, if the total amount of money he is willing to spend on
the two goods is equal to 60?

15. Suppose a consumer has utility function for goods X and Y given by U(X,Y)= X0.2Y0.3

a. What is the consumer’s marginal utility for X? What is his marginal utility for Y?
b. Suppose the price of X is equal to 4 and the price of Y equal to 6. What is the utility
maximizing consumption of X and Y, if the total amount of money he is willing to spend on
the two goods is equal to 60?

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