BBC403: MICROECONOMICS

TUTORIAL 6
CONSUMER CHOICE AND MARKET EFFICIENCY

Group A1

DANIYA ILYASSOVA
SAMAL KUSSANOVA
MAOOTAZ TORKMAN
YUNUSMETOV RUSLAN

BEB140007
BEA130004

AZRIANNA ALYSSA AZMIL BEE140005

BBC403: MICROECONOMICS
TUTORIAL 6
CONSUMER CHOICE AND MARKET EFFICIENCY

PART A: SHORT QUESTIONS.

Write the word or phrase that best completes each statement or answers
the question.
Question 1
Sherry is on vacation and wants to bring souvenirs home to family and friends. Her
souvenir budget is $100, and she can choose between T-shirts, which cost $20
each, and key chains, which cost $5 each.
a) Draw a graph of Sherry's budget line in the figure below.
b) What is the slope of Sherry's budget line? How does that slope represent an
opportunity cost? Suppose that Sherry now finds a store where T-shirts are on
sale for $10 each. (Key chains still cost $5 each).
c) Draw the new budget line in the figure.
d) What is the slope of the new budget line? How has the opportunity cost
changed?
Answer
a) The table and graph below shows Sherry`s budget line with all possibilities of
consumption of T-Shirts and Key chains for Sherry`s budget 100$, at given
price of T-Shirts 20$ each and price o Key chains 5$ each.

b) The slope of Sherry`s budget line is negative and recall that rise over run:
the increase in number of T-Shirts brings decrease in number of Key chains.
- When the price of T-Shirt is 20$, the slope equals 20 key chains
divided by 5 T-shirts equals 4 Key chains per T-Shirt
- When the price of T-Shirt is 10$, the slope equals 20 keys divided by 10
T-Shirts equals 2 key chains per T-Shirt.
The slope tells us how many number of T-shirts a key chain costs. The opportunity
cost ( or relative price) equals the price of one good divided by the price of another
good and equals the slope of the budget line.
c) The table and graph below shows Sherry`s new budget line with all
possibilities of consumption of T-Shirts and Key chains for Sherry`s budget
100$, at given price of T-Shirts 10$ each and price of Key chains 5$ each.

d) The slope line of Sherry`s new budget line rotated rightward and became
stepper. The opportunity cost decreased from 4 key chains per T-Shirt to 2
key chains per T-Shirt (see answer a)

Question 2

Tris is shopping for pants and belts. He has a budget of $100. The price of a pair of
pants is $20 and the price of a belt is $5. His marginal utility schedules are shown in
Table 2. What combination of pants and belts does Tris buy? Explain your answer.
Answer
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To find the combination of goods that Tris buys we need to:

1) Allocate the entire budget
2) Find the marginal utility per dollar of each good

Budget = 100$
Quantity
1
2
3
4
5

Pants
Marginal utility
per dollar
11
9
7
5
3

Quantity
1
2
3
4
5

Belts
Marginal utility
per dollar
17
13
9
5
3

Tris should buy 5 pants and 5 belts, because at this combination the marginal utility
of pants per dollar (MUp per $) equals marginal utility of belt per dollar (MUb per $),
which maximizes her utility.
MUp per $ = MUb per $

Question 3

Table 3 gives Sam's marginal utility schedule for bananas and apples. Sam's fruit
budget is $10.
a) If bananas cost $1 per pound and apples cost $2 per bag, what is Sam's
marginal utility per dollar for all quantities of both goods?
b) What is the utility maximizing combination of bananas and apples for Sam?
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c) If the price of bananas increases to $2 per pound, how does Sam's marginal
utility per dollar for bananas change?
d) At the banana price of $2 per pound, what is the new utility maximizing
combination of bananas and apples for Sam?
e) Plot Sam's demand curve for bananas.
Answer
a) To calculate marginal utility per dollar, we divide the marginal utility from a
good by its price.
MU$=MU/p
Budget = 10$
P of pound of bananas = 1$
P of bag of apples = 2$
Quantity
(pounds)
1
2
3
4
5
6

Bananas
Marginal utility
per dollar
30
24
18
12
6
0

Quantity
(bags)
1
2
3
4
5
6

Apples
Marginal utility
per dollar
20
17
12
8
4
0

b) The utility maximizing combination is 4 pounds of bananas and 3 bags of

apples, because at this combination the marginal utility of bananas per dollar
(MUb per $) equals the marginal utility of apples per dollar (MUa per $).
MUa per $ = MUb per $
c) If price of pound of bananas change to 2$ the marginal utility per dollar
decreases as following:
Marginal utility per dollar equals marginal utility (MU) divided by price (p)
MU$=MU/p
Budget = 10$
P of pound of bananas = 2$
Bananas
Quantity
Marginal utility
(pounds)
per dollar
1
15
2
12

Apples
Quantity
Marginal utility
(bags)
per dollar
1
20
2
17
6

3
4
5
6

9
6
3
0

3
4
5
6

12
8
4
0

d) The new utility maximizing combination is 2 pounds of bananas and 3 bags of

apples, because at this combination the marginal utility of bananas per dollar
(MUb per $) equals the marginal utility of apples per dollar (MUa per $).
MUa per $ = MUb per $

e) To build Sam`s demand curve for bananas, we need to plot the values of
marginal utilities per dollar of pound of bananas from the tables into a
graph.
- Price of bananas = 1$, Sam can buy 4 pounds (point A) bananas and 3
bags of apples
- Price of bananas = 2$, Sam can buy 2 pounds (point B) bananas and 3
bags of apples

Question 4
Suppose Jenny's marginal utility of fish is 40 and her marginal utility from chips is
20. The price of fish is $10 and the price of chips is $1. What should Jenny do to
maximize her utility? Explain your answer.
Answer
The utility maximized when marginal utility of fish per dollar (MUf per $) of equals
marginal utility of chips (MUc per $ per dollar)
MUf per $ = MUc per $ or MUf/pf = MUc/pc
MUf = 40, Pf = 10$; MUf per $ = 40/10$ = 4
MUp = 20 , Pc = 1$; MUc per $ = 20/1$ = 20,
As we can see Jennys marginal utility of fish per dollar (MUf per $) is less than
marginal utility of chips (MUc per $ per dollar), so she does not maximizes her
utility. She must buy fewer fish and more chips.
MUf per $ < MUc per $

Question 5
Figure 1 shows the demand curve for ice cream and the market price of a cone.

a) What is the value of the 15th cone, the willingness to pay for the 5th cone,
and the consumer surplus on the 5th cone?
b) How many ice cream cones are bought? Calculate the consumer surplus, the
total expenditure on ice cream, and the total benefit from ice cream.

Answer
a) The market price(value) is 2,50$, but people are willing to pay 3,50$ per 5 th
cone , so the consumer surplus on the 5 th cone equals 1$
The value of 15th cone = 2,50$
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The willingness to pay for the 5th cone

= 3,50$
Consumer surplus on the 5th cone
= 1$
b) People buy 15 cones of ice-cream
per day. Consumer surplus from
the 15 cones of ice cream that
people buy is 18,75$ , which is the
area of the green triangle. The
amount spent(expenditure) for 15
cones is 37,50$, which is the area
of the red rectangle. The total
benefit from ice cream is the
37,50$ that people spend on ice
cream plus the 18,75$ consumer
surplus that they receive 56,25$
Consumer surplus = x 2,50 x 15 = 18,75$
Expenditure = 2,50 x 15 = 37,50$
Total Benefit = 37,50 + 18, 75 = 56,25$

Question 6
Figure 2 shows the supply curve of ice cream and the market price of a cone.
a) What is the opportunity cost of the 15th cone, the minimum supply price of
the 5th cone, and the producer surplus on the 5th cone?
b) What are the quantity of ice cream cones sold, the producer surplus on ice
cream cones, the total revenue from the ice cream cones sold, and the total
cost of producing ice cream cones?
c) If the price falls to $2.00 a cone, calculate the change in total revenue and
the change in producer surplus.

10

Answer
a) The opportunity cost (OC) of the 15th cone is 2,50$, the minimum supply
price of the 5th cone is 1,50$ , so the producer surplus PS) on the 5 th cone
equals 1$
OC of the 15th cone = 2,50$
The minimum supply Price of the 5th cone =
1,50$
PS on the 5th cone = 1$
b) Sellers plan is to sell 15 cones of icecream per day. Producer surplus (PS)
from the 15 cones of ice cream that
sellers sell is 11,25$ , which is the area
of the green triangle. The total
revenue (TR) for 15 cones is 37,50$,
which is the area of the red rectangle.
The total cost (TC) from ice cream is
the total revenue 37,50$ that seller
get on ice cream minus the producer
surplus 11,25$ that they receive
26,25$
PS = x 1,50 x 15 = 11,25$
TR = 2,50 x 15 = 37,50$
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TC = 37,50 - 11, 25 = 26,25$

c) If the price falls to a 2$per cone, the

total revenue changes to 20$, and
producer surplus becomes 5$
PS = x 1 x 10 = 5$
TR = 2 x 10 = 20$

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PART B: MULTIPLE CHOICES. Choose the one alternative that best

completes the statement or answers the question.
1) E
2) B
3) D
4) C
5) A
6) D
7) C
8) D
9) C
10)
11)
12)
13)
14)
15)
16)
17)
18)
19)
20)
21)
22)
23)
24)
25)
26)
27)
28)

A
B
A
C
D
E
E
B
A
C
C
D
A
A
D
A
B
C
C

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