UNIVERSITY OF GHANA BUSINESS SCHOOL

DEPARTMENT OF FINANCE UGBS 201- MICROECONOMICS AND

2017/2018

TUTORIAL SET 4
Please I will like to suggest we go through Q1,2,4,5, 6 and 7 at tutorial. Thanks.

Problem One

Quantity Total Utility (TU) Marginal Utility (MU) Average Utility (AU)

0 - - -

1 10

2 9

3 24

4 4

5 30

6 5

7 -2

i) Fill in the blanks for AU, MU and TU

ii) Construct a graph that illustrates MU, AU and TU and analyze the
relationship between MU and AU.

iii) From the graph plotted what is the relationship between MU and TU?
Why?

Problem Two
a. Outline the properties of indifference curves.
b. Graphically explain why indifference curves do not intersect each other
c. Explain the law of diminishing marginal utility.

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 d. What is the condition for equilibrium when David is consuming one
commodity?
e. Outline and explain the consumer equilibrium for Single good case and
multiple goods case
f. From question e) explain how consumers will react when there is a price
change and how equilibrium will be restored.
Problem Three
Use the following information to work Problems 7 and 8.
The table shows the marginal utility Quantity Marginal utility from
that Ali gets from smoothies and (per day) smoothies movies
movies. Ali has $30 a week to spend.
1 7 30
The price of a movie ticket is $6, and
2 6 24
the price of a smoothie is $3.
3 5 18
4 4 12
5 3 6
6 2 0

a. If Ali buys 4 smoothies a week and sees 3 movies, does he spend all $30? What is his
utility from smoothies and his utility from movies? Does he maximize his utility? If not,
which good must he buy more of?
b. When Ali allocates his budget so as to maximize his utility, what does he buy and what is
the marginal utility per dollar?

Problem Four

Sompa consumes two goods (x and y) with a total income of GHS20 and the price of the two
goods are GHS 4.00 and GHS 5.00 for commodity X and Y respectively.

a. Write down the equation of the budget line.

b. What is the slope of the budget line?

c. How does the budget line changes if the consumer income increases to GHS 40.00 but prices
remain unchanged?

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 d. What happens to the budget line if price of good y decreases to 3 whiles the price of good x
and income remain unchanged?

e. What happens to the budget line if price of good x increases to 7 whiles the price of good x
and income remain unchanged?

f. How much of good x can Efo consume if he spends his entire income on that good?

g. How much of good y can Efo consume if he spends his entire income on that good?

Problem Five

David’s utility function for good X and Y is given by ( ) . Where and I are
the price of good X, price of good Y and consumer income respectively.

a. Write the budget Constraint of the consumer.

c. What combination of X and Y maximizes the consumer’s at I=100,

d. Calculate the marginal rate of substitution between X and Y at equilibrium and interpret your
results.

e. Suppose David faces a new utility function such as ( ) for consuming

f. Suppose David faces another new utility function such as ( ) for consuming
commodity X and Y, redo question b. and c.

Problem Six

With the aid of a diagram analyze the income, substitution and total effect of a price change on
the following type of goods.

a. Normal goods
b. Inferior goods
c. Giffen goods

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 Problem Seven

For each of the following pairs goods, which good would you expect to have more
elastic demand and why?
a) Required textbooks or mystery novels

b) Beethoven recordings or classical music recordings in general.

c) Subway rises during the next six months or subway rides during the next five years.

d) Root beer or water.

e) Food or rice

f) Your land lord give you two days or two weeks to vacate your residence.

g) Fanta or water.

h) Buying an apartment in the USA or buying Apple iphone 6s plus.

i) Watching the men football world cup tournament or watching English Premier
League.

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