UNIVERSITY OF DAR ES SALAAM

BUSINESS SCHOOL
Department of Finance
FN100: Principles of Microeconomics
2018/19 Academic Year

Seminar Discussion Questions: Topic Two - Part 1 (Utility and Demand)

Group Three
Group Three
Question
Question One One
Consider
(a) Consider the graph of the graph
indifference curvesof indifference curves below:
below:
Coffee

A C

IC2
B
IC1
Doughnuts
(i) Which point has the highest total utility?
(ii) How does total utility at point A compare to total utility at point B?
(iii) Suppose there is consumer equilibrium at point C. Draw in a budget line that
would correspond to equilibrium at that point.

Question Two
Suppose my son, Mike has a weekly budget of 6,000/= and consumes two goods:
toy dinosaurs, which cost 500/= each and hot wheels, which cost 1,000 each.
(i) Draw Timmy’s budget line on the graph below. Be sure to label the end points.
(i) Draw Mike’s budget line on the graph below. Be sure to label the end points.
Toy Dinosaurs

Hot Wheels
(ii) On the graph above, add an indifference curve and mark the consumer
equilibrium.
(iii) Suppose Timmy gets a raise in his allowance to 8,000/=. How will this affect his
budget line? Draw the new one on the graph above.

Question Three
Draw a set of indifference curves for the following pairs of goods:
(i) Meat and carrots for a vegetarian who neither likes nor dislikes meat.
(ii) Bread and milk for an individual who always consume them together.
(iii) Fortune and Business Week for an individual who regard these two magazines
are perfect substitutes.
(iv) Ice cream and pie if these are goods that you like, but if you eat too much of
either, you get sick of them. If you are sick of a good, eating more of it lowers your
utility.

Group Four
Question One
What is the difference between the following terms as they apply in the theory of
consumer behaviour? If necessary make use of well labelled diagrams.
(i) Marginal Rate of Substitution and Marginal Utility.
(ii) Perfect substitutes and perfect complements goods.
(iii) Substitution and income effect.
(iv) Cardinal and ordinal utility.
(v) Normal and inferior goods.
(b) The figure below shows the indifference curve for Mr. Kauze
Question Two
Kauzeni
The spends
figure below shows all his income
the indifference on
curve fortwo goods,
Mr. Shika’s X and Y.
consumption of good X
and Y. Mr. Shika spends all his income on two goods, X and Y.
Qty of Y

20

40 Qty of X
(i) Assume that the price of good Y is 500/=. What is his income?
(ii) What is the price of X and slope of the budget line?
(iii) Express the budget line of Shika as a linear equation

Question Three
Suppose John views butter and margarine as perfect substitutes for each other:
(i) Draw a set of indifference curves that describe John’s preference for butter and
margarine.
(ii) Are these indifference curves convex? Why?
(iii) If butter costs 2,000/= per package and margarine only 1,000/= and if John has
20,000/= budget to spend for the month, which butter-margarine market basket will
he choose? Show your answer graphically.
Revision Questions
Question One
(a) John likes drinking beer but hates studying. When John studies more, he must
increase his beer consumption to remain at a particular level of utility. Is the
statement true or false? If it is true, provide explanations and draw John’s utility
function; and if false, explain why?
(b) Using well labelled diagrams, discuss the characteristics of indifference curves.
(c) Discuss how the demand curve of an individual consumer is derived from
consumption choices that a person makes when faced with budget constraint.
(d) Max enjoys windsurfing and snorkelling. The table below shows the total utility
(TU) he gets from each activity:
Hour TU from MU TU from MU
s per windsurf from snorkelli from
day ing windsurf ng snorkelli
ing ng
1 120 40
2 220 76
3 300 106
4 360 128
5 400 140
6 412 150
(i) Fill in the marginal utility (MU) from each additional hour of windsurfing and
snorkelling on the table above.
(ii) Suppose Max has a $35 budget and unlimited leisure time. Windsurfing is
$10/hour and snorkelling is $5/hour. In order to maximize his total utility, how much
time does Max spend on windsurfing and snorkelling? Show your work. (HINT: Try
different combination within his budget, using the utility maximization rule of Marginal
Utility per dollar)

Question Two
(a) State and justify the ‘law of demand’.
(b) Give an account of the factors that influence the demand for a commodity.
(c) When a price of beef is Tshs 4,000/= per kilogram, Mr. Kalimanzira buys 10
kilograms of beef per month to meet the protein requirement for his family. At the
end of the last month (Dec 2009), the price of beef raised to 6,000/= per kilogram.
However, Mr. Kalimanzira monthly net income has increased by 20,000/= effectively
1st January 2010. Use a well labelled diagram, (if necessary), explain how Mr.
Kalimanzira will react to above changes (if beef is normal good) and state with
reasons whether he will be better off or worse off after the beef price and his net
income increase than he was before.
(d) Write whether these statements are true or false and explain why?
(i) “If S and F are perfect complements you must be indifferent between these two
bundles”; (1) one unit of S and one unit of F; and (2) two units of S and one unit of F.
(ii) “Ursula and Jessica are dining at Stanley’s Surf and Turf, which sells only
lobsters and steaks. An economics student working part-time in the restaurant asks
the two customers about their marginal rates of substitution (MRS) and discovers
that Ursula’s MRS of lobster for steak is –2. Ursula and Jessica face the same prices
for the two foods. Therefore, we know Jessica’s MRS of lobster for steak must also
equal –2.”