UNIVERSITY OF KWAZULU-NATAL

SCHOOL OF ACCOUNTING, ECONOMICS & FINANCE

ECON 202: INTERMEDIATE MICRO AND APPLICATIONS

Tutorial 1 Answer Guidelines: Week commencing 31 July 2024

Coverage: Perloff, Chapter 4 up to Constrained Choice

Part A. Scaffolded problem question

(These are mostly intuitive ‘conversational’ guides not model answers!)

Question 1
Suppose Shaka's utility for lobster (L) and soda (S) can be represented as U = L0.5 S0.5.

a) Draw the indifference curve that yields a utility level of 9. Calculate the MU L, MUS, and
MRS of L for S on that indifference curve when S = 3.

b) Use your diagram to explain what we mean by ‘diminishing MRS’.

c) Explain whether each of the following is true or not:

i. Shaka considers lobsters and sodas to be imperfect substitutes.

ii. The more lobsters he consumes, the more sodas you would need to offer him in order to
persuade him to give up one lobster.
iii. If someone offered him one more can of soda in exchange for 5 lobsters, he would not be
willing to make the trade.
iv. At his current consumption bundle where MRS = -9, Shaka gets the same marginal utility
from a lobster and a soda.

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Question 2
Lindi consumes cans of chickpeas (C) and packets of biscuits (B) each month. Her
indifference curves show diminishing MRS. She is currently consuming where C = 10 and B
= 7, and her MRS between cans of chickpeas and packets of biscuits is –2 (= MUB / MUC).

a) Represent this information on an indifference curve diagram. (Hint: put cans of chickpeas
on the vertical axis and packets of biscuits on the horizontal axis).

b) Can we say from the information given above whether Lindi is in equilibrium if she
currently consumes 10 cans of chickpeas and 7 boxes of biscuits a month? (If not, what
information do we still need to draw this conclusion?)

c) Now assume Lindi spends all her monthly income of R300 on just these two goods.
Consider these price combinations:

A B C

Price of can of chickpeas R15 R2 R12,50

Price of packet of biscuits R30 R40 R25

Can you identify which (of A, B & C above) meets the conditions that would allow us to say
she is currently in equilibrium at her consumption bundle of 10C and 7B? Explain why - and
explain why the other options are incorrect.

d) Add a budget line based on the correct prices (spoiler alert: option C is the right one – be
sure you know why) to your diagram illustrating Lindi’s consumption choice in
equilibrium.

e) Explain verbally and briefly: what would happen if the price of biscuits fell (cet. par.)?

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Part B. Multiple choice question

1. Which of the following consumers’ behaviour does not conform to the properties of
preference ordering?

A. Rethabile prefers jazz to hip hop and prefers jazz to kwaito.

B. Aman is indifferent between two brands of tablet computers.
C. Bradley claims that the second slice of cheesecake does not taste as good as the first one.
D. Rowena cannot compare sushi and pizza because she has never eaten sushi.
E. Thato prefers burgers to pizza and pizza to fried chicken, so he always chooses burgers
over chicken.

2. An indifference curve represents bundles of goods that a consumer

A. views as equally desirable.

B. ranks from most preferred to least preferred.
C. can afford to buy only.
D. buys with a given budget.
E. All of the above.

3. Which one of the following statements about the assumptions behind a rational
consumer’s preferences is false?

A. If Lettie prefers a bundle with 6 movies and 3 books to a bundle with 6 movies and 5
books, then the more-is-better assumption has been violated.
B. If Lettie says she is indifferent between Just Juice and Liquifruit, and does not mind
whether she drinks Liquifruit or Appletiser, then she will be indifferent between Just
Juice and Appletiser.
C. If Lettie says she is indifferent between Just Juice and Liquifruit, her preferences still
conform to the assumption of completeness.
D. If Lettie cannot compare Just Juice to Lipton Iced Tea because she has not had iced tea
before, her preferences are incomplete.
E. If Lettie says she is willing to pay more for the first can of Just Juice than for the second,
then the property of diminishing marginal utility has been violated.

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 4. Consider the indifference curve shown in the following diagram:

Which one of the following statements is correct?

B, Burritos per semester

A. If Fanta and samoosas are both goods, this

Fanta (cans/semester) indifference curve violates the assumption of
b completeness of preferences.
B. If Fanta and samoosas are both goods, this
indifference curve violates the assumption of transitivity
of preferences.
a
C. If Fanta and samoosas are both goods, this
I indifference curve violates the assumption of more-is-
better.
D. This indifference curve shows that both Fanta and
samoosas are bads.
Z, Pizzas per semester
E. The marginal rate of substitution is constant
Samoosas/semester
everywhere along this indifference curve.

5. Consider indifference curves for consumers Axel and Bivasha, for consumption of two
goods – fishfingers and oven chips. The indifference curves are drawn with number of
fishfingers on the horizontal axis, and oven chips on the vertical axis. Axel has a much
stronger preference for fishfingers relative to oven chips than Bivasha. Compared to
Bivasha’s indifference curves, Axel’s indifference curves are:

A. Steeper
B. Flatter
C. Higher
D. More convex
E. Less convex

6. Given a budget constraint with rice on the horizontal axis and potatoes on the vertical
axis, a decrease in income with a simultaneous increase in the price of rice will cause the
budget constraint to shift _____(i)______ and have a/the _____(ii)______ slope.

A. i) outwards ii) steeper

B. i) outwards ii) same
C. i) inwards ii) steeper
D. i) inwards ii) flatter
E. i) inwards ii) same

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7. Let good A be on the horizontal axis and good B be on the vertical axis. The Marginal
Rate of Transformation is:

A. the way the market allows the consumer to buy 1 more unit of good A by sacrificing
some of good B and still spend their budget exactly.
B. the way consumer is willing to sacrifice some of good B to get an extra unit of good A
and remain on the same level of total utility.
C. the price of good B divided by the price of good A.
D. always equal to the Marginal Rate of Substitution.
E. All of the above.

Questions 8 and 9 refer to the diagram below, which shows two indifference curves and
several options for consumption bundles for a consumer.

8. Using the information from the diagram, we can say that:

A. the consumer prefers bundle B to bundle D.

B. a bundle containing 3 slices of carrot cake and 3 scoops of ice cream would give the
consumer more satisfaction than bundle E.
C. the consumer is indifferent between bundle A and a bundle containing 3 slices of carrot
cake and 1 scoop of ice cream.
D. the consumer likes bundle B more than bundle C, which is preferred to bundle A.
E. the consumer gets the same amount of total utility from bundle B as from bundle C, as
they contain the same quantity of ice cream.

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9. The marginal rate of substitution between carrot cake and ice cream:

A. shows that, holding total utility constant, the consumer is always willing to give up one
piece of carrot cake if she is compensated with one scoop of ice cream.
B. shows that the consumer regards carrot cake and ice cream as perfect complements.
C. diminishes as we move downwards along a given indifference curve.
D. shows that the consumer always eats one piece of pie with one scoop of ice cream.
E. is undefined.

10. If the utility function (U) between food (F) and clothing (C) can be represented as U =
, the marginal utility of food equals

A. .
B. .
C. 1/2 .
D. 1/2 .
E. Impossible to calculate.

11. Given a consumer’s budget constraint with coffee on the vertical axis and tea on the
horizontal axis, if the consumer is consuming on his budget constraint where his marginal
rate of substitution is 5, and the price of coffee is R2 and the price of tea is R1.50, then
the consumer is:

A. Purchasing too much coffee for utility maximisation

B. Purchasing too much tea for utility maximisation
C. Purchasing too little tea and coffee to maximise his utility
D. Purchasing just the right amount of each good for utility maximisation
E. Purchasing less than the budget allows, and thus is not maximising his utility

12. Suppose an individual’s MRS of beer for sausages is 1/5. That is, at her current
consumption choices she is willing to give up 1/5 of a beer to get an additional sausage.
Suppose also that the price of a beer is R10 and the price of a sausage is R2.50. In order
to increase utility, this individual should:

A. not change her current consumption.

B. buy only beer.
C. buy only sausages.
D. buy more beer and fewer sausages.
E. buy more sausages and less beer.

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Use the following diagram and information to answer questions 13-15. The diagram
shows the budget line and indifference curves for Karl – a consumer who uses his income to
purchase food and clothes. The price of food is R10/unit and the price of clothes is R50/unit.

13. The horizontal intercept and slope of Karl’s budget line are:

A. 500, - 1/50
B. 10, - 1
C. 25, - 0.4
D. 100, - 10
E. 50, - 1/5

14. At his current consumption bundle, Karl is willing to give up one unit of clothes for ten
units of food. (The price of food is still R10 and the price of clothes is R50.) What is his
consumption bundle on the diagram above?

A. Bundle A
B. Bundle B
C. Bundle C
D. Bundle D
E. It could be either A or B.

15. At his current consumption bundle D, for Karl:

A. The last Rand spent on clothes gives him less utility than the last Rand spent on food and
therefore he should buy more clothes and less food than he does at his current bundle.
B. The last Rand spent on clothes gives him more utility than the last Rand spent on food
and therefore he should buy more clothes and less food than he does at his current bundle.
C. The last Rand spent on clothes gives him less utility than the last Rand spent on food and
therefore he should buy less clothes and more food than he does at his current bundle.
D. The last Rand spent on clothes gives him more utility than the last Rand spent on food
and therefore he should buy less clothes and more food than he does at his current bundle.
E. He cannot afford the food at his current bundle and therefore he must buy less food
although he does not need to reduce spending on clothes.
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