AASTU Assignment II

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Addis Ababa Science and Technology University

Introduction to Economics
Assignment II Max. Value 10%
1. Suppose Bilen frequently visits Tomoca coffee corner, a favorite coffee shop in Addis
Ababa, to buy and consume coffee. The information about the total utility Bilen gains
from coffee is given in the table below:

Cups of coffee (numbers) Total utility (Birr)


1 1.50
2 2.70
3 3.60
4 3.60
5 2.00
Then, answer the following questions:

A. Sketch the total utility curve for Bilen.


B. Show/explain whether or not this example exhibits the Law of Diminishing Marginal
Utility.
C. If the price of each cup is 1Birr, how many cups of coffee can Bilen buy? Why?
(Hint: think of the marginal approach)
D. If the price of each cup is 0.50Birr, how many cups of coffee can Bilen buy? Why?
(Hint: think of the marginal approach)

2. Consider that Abebe consumes two goods, cloth (Good X) and pizza (Good Y). The price of
cloth and pizza are 2 Birr and 4 Birr respectively. Assume also that Abebe has a total income
of 100 Birr. He faces a preference represented by U (X, Y) = X1/3Y2/3

A. Write the budget line equation and plot it on the graph.


B. Compute the optimum level of consumption of cloth (X) and pizza (Y).
C. Suppose that Abebe’s income increases from 100 Birr to 150 Birr, then determine the
new optimum consumption bundle.
D. Suppose that the price of cloth (Good X) raises to 3 Birr, then determine the new
optimum consumption bundle.

3. Suppose that the demand for Abay Car (QA) is estimated to be


QA = 150 – 9PA – 5PG + 10M + 0.5PT
Where QA is demand for Abay Car, PA is price of Abay car, PG is price of gasoline, M is
consumer income and PT is Price of Toyota Car. If PA = 10, PG = 10, M = 50 and PT = 180,
then determine
a) Own Price elasticity of demand, and interpret the result
b) Income elasticity of demand, and interpret the result
c) Cross price elasticity of demand between quantity demand for Abay Car and price of
Gasoline, and interpret the result

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