Page 68 - DECO405_MANAGERIAL_ECONOMICS

Unit 4: Consumer Behaviour (Utility Analysis)

(c) Manish gets a research grant and his income increases to 4000 a month. What is the Notes
new equation of his budget line? What if income stays constant at 2000, and the
price of a book increases to 5000?

(d) Assume that prices are the same as used in part a. If the marginal utility of a book is
20, what is the marginal utility of coffee if he is maximizing his utility?
(e) Now assume that textbooks and coffee are complements for Manish. For him to
consume one textbook, he needs 1 cup of coffee. How many textbooks does he
consume given his income of 2000, and the prices used in part a? What if economics
is so boring that Manish needs 2 coffees for every book that he consumes?
8. Discuss with example the law of marginal utility.
9. Assign a measure of utility to the study you are putting into your various courses. Do your
study habits follow the principle of rational choice?
10. What assumptions would you never alter while working on the theory of individual
choice and why?
11. The marginal utility of consumption of good A is 40; it changes by 2 with each change in
good A consumed. The marginal utility of consumption of another good B is also 40 but
changes by 3 with each change in good B consumed. The price of good A is 20 and the
price of good B is 30. How many of good A and good B should you consume?
12. Why do you think that the law of Equi-marginal utility holds under perfectly competitive
market.

13. The following table shows the marginal utility of your consumption of three goods, A, B
and C.

Units of Consumption MU of A MU of B MU of C
1 20 25 45
2 18 20 30
3 16 15 24
4 14 10 18
5 12 8 15
6 10 6 12

(a) Good A costs 80 per unit, and good B costs 40 and good C costs 120. How many
units of each should be consumed with 480 to maximise utility?
(b) How will the answer change if the price of B rises to 80?
14. Explain the properties of indifference curves with the help of suitable examples.
15. Explain the concepts of consumer and producer surplus with help of an example and
figure.

Answers: Self Assessment

1. (a) False (b) True (c) True (d) True
(e) False (f) True (g) True
2. (a) satisfaction (b) price line (c) marginal rate of substitution

(d) indifferent (e) J.R. Hicks (f) zero
(g) total utility (h) money

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