Page 67 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes 4.10 Review Questions

1. Examine how the concept of Diminishing Marginal Utility can help to explain the
downward slope of the demand graph.
2. Suppose Charlie Parker CDs cost $10 apiece and Lester Young CDs cost $5 apiece. You
have $40 to spend on CDs. The marginal utility that you derive from additional CDs is as
follows:
# of CDS ----------- Charlie Parker --------- Lester Young

Have 0 buy number 1 ----------- 60 ---------- 30
Have 1 buy number 2 ------------ 40 ---------- 28
Have 2 buy number 3 ----------- 30 ---------- 24
Have 3 buy number 4 ------------ 20 --------- 20
Have 4 buy number 5 ------------ 10 --------- 10
How many of each CD would you buy? Suppose the price of a Lester Young CD rises to
$10. How many of each CD would you buy? Use this to show how the principle of rational
choice leads to the law of demand.
3. Discuss the law of diminishing marginal utility with the help of an illustrate schedule and
a corresponding graph.
4. Which of the following examples best shows the Law of Diminishing Marginal Utility and
why?
(a) Raina is happier after buying her fifth pair of shoes than she was after only four
pairs.
(b) A reasonably fat Motumal gets sick after eating too many Burgers.
(c) Ramnaresh loves cheeseburgers but finds that the third burger did less to increase
his happiness than the second burger did.
5. Give at least five examples to show how the law of diminishing marginal utility relates to
everyday life?
6. Every utility function uniquely determines the ordinal preferences, but for any ordinal
preferences, there are many utility functions that represent those preferences. Is this
statement true or false? Explain with reasons.
7. Manish is a typical economics graduate student and consumes 2 goods: economics text
books and coffee. He also earns a part time earning of 2000 a month. He can either spend
it all on books and get 5 or on coffee and get 20 cups.
(a) Given this information, construct the equation for Manish's budget line (put books
on the x-axis and coffee on the y-axis).
(b) The following are the bundles that Manish can afford with his income:
Books Coffee
1

0
8
2
In the above table, fill in the blanks with the quantities that will exhaust Manish's
income.

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