Handout Three-Consumer Behavior-Chapter Six
Q-1: Complete the following table and answer the questions below:
Units 0 1 2 3 4 5 6
Consumed Total Utility 0 10 - 25 30 - 34
Marginal Utility - 10 8 - - 3 -
A. At which rate is total utility increasing: a constant rate, a decreasing rate, or an increasing
rate? How do you know?
B. “A rational consumer will purchase only 1 unit of the product represented by these data,
since that amount maximizes marginal utility.” Do you agree? Explain why or why not.
C. “It is possible that a rational consumer will not purchase any units of the product
represented by these data.” Do you agree? Explain why or why not.
Q-2: Mrs. Maria buys loaves of bread and quarts of milk each week at prices of Rs. 1 and 80
paisa, respectively. At present she is buying these products in amounts such that the marginal
utilities from the last units purchased of the two products are 80 and 70 utils, respectively. Is she
buying the utility maximizing combination of bread and milk? If not, how should she reallocate
her expenditures between the two goods?
Q-3: Zafar’s total utility from singing the same song over and over is 50 utils after one
repetition, 90 utils after two repetitions, 70 utils after three repetitions, 20 utils after four
repetitions, 250 utils after five repetitions, and 2200 utils after six repetitions. Write down his
marginal utility for each repetition. Once Zafar’s total utility begins to decrease, does each
additional singing of the song hurt more than the previous one or less than the previous one?
Q-4: Ali likes Coca-Cola. After consuming one Coke, Ali has a total utility of 10 utils. After
two Cokes, he has a total utility of 25 utils. After three Cokes, he has a total utility of 50 utils.
Does Ali show diminishing marginal utility for Coke, or does he show increasing marginal utility
for Coke? Suppose that Ali has Rs. 3 in his pocket. If Cokes cost Rs. 1 each and Ali is willing to
spend one of his dollars on purchasing a first can of Coke, would he spend his second dollar on a
Coke, too? What about the third dollar? If Ali’s marginal utility for Coke keeps on increasing no
matter how many Cokes he drinks, would it be fair to say that he is addicted to Coke?
Q-5: Suppose that Omar’s marginal utility for cups of coffee is constant at 1.5 utils per cup no
matter how many cups he drinks. On the other hand, his marginal utility per doughnut is 10 for
the first doughnut he eats, 9 for the second he eats, 8 for the third he eats, and so on (that is,
declining by 1 util per additional doughnut). In addition, suppose that coffee costs Rs. 1 per cup,
doughnuts cost Rs. 1 each, and Omar has a budget that he can spend only on doughnuts, coffee,
or both. How big would that budget have to be before he would spend a dollar buying a first cup
of coffee?
Q-6: Columns 1 through 4 in the table given below show the marginal utility, measured in
utils, that Khan would get by purchasing various amounts of products A, B, C, and D. Column 5
shows the marginal utility Khan gets from saving. Assume that the prices of A, B, C, and D are,
respectively, Rs. 18, Rs. 6, Rs. 4, and Rs. 24 and that Khan has an income of Rs. 106.
A. What quantities of A, B, C, and D will Khan purchase in maximizing his utility?
B. How many dollars will Khan choose to save?
C. Check it by substituting them into the algebraic statement of the utility-maximizing rule.
Q-7: You are choosing between two goods, X and Y, and your marginal utility from each is as
shown in the table below. If your income is Rs. 9 and the prices of X and Y are Rs. 2 and Rs. 1,
respectively, what quantities of each will you purchase to maximize utility? What total utility
will you realize? Assume that, other things remaining unchanged, the price of X falls to Rs. 1.
What quantities of X and Y will you now purchase? Using the two prices and quantities for X,
derive a demand schedule (a table showing prices and quantities demanded) for X.
Q-8: Suppose that with a budget of Rs. 100, Zainab spends Rs. 60 on basmati and Rs. 40 on
chaki ata when basmati costs Rs. 2 per k.g and chaki ata cost Rs. 2 per k.g. But then, after the
price of chaki ata falls to Rs. 1 per k.g, she spends Rs. 50 on basmati and Rs. 50 on chaki ata.
How many k.gs of basmati and how many chaki ata did Zainab consume before the price
change? At the new prices, how much money would it have cost Zainab to buy those same
quantities (the ones that she consumed before the price change)? Given that it used to take
Zainab’s entire Rs. 100 to buy those quantities, how big is the income effect caused by the
reduction in the price of chaki ata?
Q-9: Assume that the data in the accompanying table give an indifference curve for A B
Mr. Ali. Graph this curve, putting A on the vertical axis and B on the horizontal axis. 16 6
Assuming that the prices of A and B are Rs. 1.50 and Rs. 1, respectively, and that Mr. 12 8
Ali has Rs. 24 to spend, add his budget line to your graph. What combination of A and B 8 12
will Mr. Ali purchase? Does your answer meet the MRS=PB/PA rule for equilibrium? 4 24
Explain graphically how indifference analysis can be used to derive a demand curve.
