A Level

Economics Paper-3 
Topical Solved MCQ's
(1980 - 2018)
Features:
All variants
1274 MCQs Classified in 20 chapter and 84 subtopics
References of repeated questions added
Solved with explanation of all choices A,B,C & D
Questions order from new to old & easy to difficult
MCQ’s grouped in (Descriptive)(Graphical)
(Numerical) questions
Author:
Imran Latif
Beaconhouse Defense Campus Lahore
Beaconhouse College Campus Gulberg, Lahore
Beaconhouse AL J T, Lahore
Lahore College of Arts & Sciences ( LACAS) Johar Town Campus
Keynesian Institute of Management Scienc es (KIMS )
Green Hall Academy
Editor:
Raza Haider
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Title Economics A Level P-3 Topical Solved

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 Preface
This book provides a thorough exercise of paper 3 for students taking Cambridge International
Examinations A-Level Economics. Multiple Choice Questions from past examinations are sorted into
relevant chapters and topics which will enable students to practice their understanding systematically.
We appreciate our students and fellow teachers who helped us to improve this book. Your suggestions
and comments will be highly appreciated.

Imran Latif
M.A. Economics
M.A. Mass Communication
Cell: +92 300 4410900
Email: imranlatifmalik@gmail.com

REVIEW BOARD
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 CONTENTS
UNIT 1 THEORY OF CONSUMER BEHAVIOUR -------------------------------------------------------- 23
1.1 Law of diminishing marginal utility ------------------------------------------------------------------- 23
Answer Section ---------------------------------------------------------------------------------------- 27
1.2 Law of equi-marginal utility ----------------------------------------------------------------------------- 30
Answer Section ---------------------------------------------------------------------------------------- 35
1.3 Budget line --------------------------------------------------------------------------------------------------- 39
Answer Section ---------------------------------------------------------------------------------------- 48
1.4 Indifference curve analysis ----------------------------------------------------------------------------- 55
Answer Section ---------------------------------------------------------------------------------------- 57

UNIT 2 PRODUCTION & COST ---------------------------------------------------------------------------------------- 59

2.1 Law of diminishing returns ----------------------------------------------------------------------------- 59
Answer Section ---------------------------------------------------------------------------------------- 64
2.2 Long Run production function (Least cost inputs mix) --------------------------------------------- 68
Answer Section ---------------------------------------------------------------------------------------- 72
2.3 Accounting cost and economic cost ------------------------------------------------------------------- 75
Answer Section ---------------------------------------------------------------------------------------- 78
2.4 Short-run costs --------------------------------------------------------------------------------------------------- 79
Answer Section ---------------------------------------------------------------------------------------- 93
2.5 Returns to scale ---------------------------------------------------------------------------------------- 107
Answer Section ---------------------------------------------------------------------------------------- 110
2.6 Economies and diseconomies of scale ------------------------------------------------------------------- 113
Answer Section ---------------------------------------------------------------------------------------- 115
2.7 Minimum efficient scale ---------------------------------------------------------------------------------------- 117
Answer Section ---------------------------------------------------------------------------------------- 121
2.8 Isoquant and isocost ---------------------------------------------------------------------------------------- 123
Answer Section ---------------------------------------------------------------------------------------- 125
2.9 Small firms --------------------------------------------------------------------------------------------------- 126
Answer Section ---------------------------------------------------------------------------------------- 128
2.10 Multiple topics of chapter 2 ----------------------------------------------------------------------------- 130
Answer Section ---------------------------------------------------------------------------------------- 131

UNIT 3 RULES OF FIRM'S BEHAVIOUR ------------------------------------------------------------------- 132

3.1 Profit maximization (MR=MC) rule ------------------------------------------------------------------- 132
Answer Section ---------------------------------------------------------------------------------------- 135
3.2 Shut down Rule ---------------------------------------------------------------------------------------- 137
Answer Section ---------------------------------------------------------------------------------------- 140
3.3 Multiple topics of chapter 3 ---------------------------------------------------------------------------- 142
Answer Section ---------------------------------------------------------------------------------------- 142

UNIT 4 PERFECT COMPETITION ----------------------------------------------------------------------------- 143

4.1 Perfect Competition ---- Short-run price and output determination ---------------------------------- 143
Answer Section ---------------------------------------------------------------------------------------- 145
4.2 Perfect Competition ---- Short-run supply curve of a firm --------------------------------------------- 147
Answer Section ---------------------------------------------------------------------------------------- 148
4.3 Multiple topics of chapter 4----------------------------------------------------------------------------------- 149
Answer Section ---------------------------------------------------------------------------------------- 153
UNIT 5 MONOPOLY --------------------------------------------------------------------------------------------------- 155
5.1 Monopoly ---- Revenue curves ----------------------------------------------------------------------------- 155
Answer Section ---------------------------------------------------------------------------------------- 159
5.2 Monopoly ---- Short-run price and output determination --------------------------------------------- 161
Answer Section ---------------------------------------------------------------------------------------- 164
5.3 Monopoly ---- Multiple topics of chapter 5---------------------------------------------------------------- 167
Answer Section ---------------------------------------------------------------------------------------- 169

UNIT 6 MONOPOLISTIC COMPETITION ------------------------------------------------------------------- 170

6.1 Monopolistic Competition ----------------------------------------------------------------------------- 170
Answer Section ---------------------------------------------------------------------------------------- 172

UNIT 7 OLIGOPOLY --------------------------------------------------------------------------------------------------- 174

7.1 Oligopoly ---- Kinked Demand Curve ------------------------------------------------------------------- 174
Answer Section ---------------------------------------------------------------------------------------- 176
7.2 Oligopoly ---- Price leadership and cartel ------------------------------------------------------------------- 178
Answer Section ---------------------------------------------------------------------------------------- 179
7.3 Oligopoly ---- Determinants of price collusion -------------------------------------------------------- 181
Answer Section ---------------------------------------------------------------------------------------- 183
7.4 Oligopoly ---- Growth of firms (Mergers and integration) --------------------------------------------- 184
Answer Section ---------------------------------------------------------------------------------------- 186
7.5 Oligopoly ---- Multiple topics of chapter 7 ------------------------------------------------------------------- 187
Answer Section ---------------------------------------------------------------------------------------- 190

UNIT 8 COMPARISON OF MARKET STRUCTURES -------------------------------------------------------- 193

8.1 Comparison of market structures ------------------------------------------------------------------- 193
Answer Section ---------------------------------------------------------------------------------------- 197
8.2 Concentration ratio ---------------------------------------------------------------------------------------- 200
Answer Section ---------------------------------------------------------------------------------------- 202

UNIT 9 FIRM'S OBJECTIVES, PRICE DISCRIMINATION AND CONTESTABLE MARKETS -- 203

9.1 Objectives of firms ---------------------------------------------------------------------------------------- 203
Answer Section ---------------------------------------------------------------------------------------- 216
9.2 Price discrimination ---------------------------------------------------------------------------------------- 223
Answer Section ---------------------------------------------------------------------------------------- 225
9.3 Contestable markets ---------------------------------------------------------------------------------------- 226
Answer Section ---------------------------------------------------------------------------------------- 230

UNIT 10 ECONOMIC EFFICIENCY & MARKET FAILURE --------------------------------------------- 232

10.1 Economic efficiency ---------------------------------------------------------------------------------------- 232
Answer Section ---------------------------------------------------------------------------------------- 237
10.2 PPC & economic efficiency ----------------------------------------------------------------------------- 239
Answer Section ---------------------------------------------------------------------------------------- 241
10.3 Socially optimum output & types of market failure --------------------------------------------- 242
Answer Section ---------------------------------------------------------------------------------------- 247
10.4 Imperfect market & market Failure ------------------------------------------------------------------- 249
Answer Section ---------------------------------------------------------------------------------------- 256
10.5 Government policies ----------------------------------------------------------------------------- 261
Answer Section ---------------------------------------------------------------------------------------- 265
10.6 Multiple topics of chapter 10 ------------------------------------------------------------------- 267
 Answer Section ---------------------------------------------------------------------------------------- 268

UNIT 11 LABOUR MARKET ---------------------------------- 269

11.1 Marginal revenue product (MRP) ------------------------------------------------------------------- 269
Answer Section ---------------------------------------------------------------------------------------- 273
11.2 Individual Supply of labour ----------------------------------------------------------------------------- 275
Answer Section ---------------------------------------------------------------------------------------- 276
11.3 Firm and market supply of labour ------------------------------------------------------------------- 277
Answer Section ---------------------------------------------------------------------------------------- 279
11.4 Marginal cost of labour ---------------------------------------------------------------------------------------- 280
Answer Section ---------------------------------------------------------------------------------------- 283
11.5 Wage determination in perfect market ------------------------------------------------------------------- 287
Answer Section ---------------------------------------------------------------------------------------- 294
11.6 Wage determination in monopsony ------------------------------------------------------------------- 299
Answer Section ---------------------------------------------------------------------------------------- 299
11.7 Wage determination with trade union ------------------------------------------------------------------- 300
Answer Section ---------------------------------------------------------------------------------------- 303
11.8 Strength of trade union ---------------------------------------------------------------------------------------- 305
Answer Section ---------------------------------------------------------------------------------------- 307
11.9 Wage differentials ---------------------------------------------------------------------------------------- 310
Answer Section ---------------------------------------------------------------------------------------- 313
11.10 Economic rent and transfer earnings ------------------------------------------------------------------- 314
Answer Section ---------------------------------------------------------------------------------------- 321
11.11 Multiple topics of chapter 11 ----------------------------------------------------------------------------- 325
Answer Section ---------------------------------------------------------------------------------------- 329

UNIT 12 INEQUALITY AND POLICIES TO DISTRIBUTE INCOME-------------------------------------------- 331

12.1 Means tested benefits ---------------------------------------------------------------------------------------- 331
Answer Section ---------------------------------------------------------------------------------------- 332
12.2 Types of taxes --------------------------------------------------------------------------------------------------- 333
Answer Section ---------------------------------------------------------------------------------------- 341
12.3 Gini coefficient and Lorenz curve ------------------------------------------------------------------- 345
Answer Section ---------------------------------------------------------------------------------------- 346
12.4 Multiple topics of chapter 12 ----------------------------------------------------------------------------- 347
Answer Section ---------------------------------------------------------------------------------------- 348

UNIT 13 NATIONAL INCOME ACCOUNTING ------------------------------------------------------------------- 349

13.1 Concepts of national income ----------------------------------------------------------------------------- 349
Answer Section ---------------------------------------------------------------------------------------- 351
13.2 Nominal and Real GDP ---------------------------------------------------------------------------------------- 352
Answer Section ---------------------------------------------------------------------------------------- 354
13.3 Methods of measuring national income ------------------------------------------------------------------- 356
Answer Section ---------------------------------------------------------------------------------------- 359

UNIT 14 ECONOMIC GROWTH & DEVELOPMENT -------------------------------------------------------- 361

14.1 Meaning of economic growth ----------------------------------------------------------------------------- 361
Answer Section ---------------------------------------------------------------------------------------- 362
14.2 Actual versus potential growth ----------------------------------------------------------------------------- 363
Answer Section ---------------------------------------------------------------------------------------- 365
14.3 Factors contributing to economic growth ------------------------------------------------------------------- 366
 Answer Section ---------------------------------------------------------------------------------------- 372
14.4 Costs and benefits of growth ----------------------------------------------------------------------------- 375
Answer Section ---------------------------------------------------------------------------------------- 376
14.5 Standard of living ---------------------------------------------------------------------------------------- 377
Answer Section ---------------------------------------------------------------------------------------- 381
14.6 Economic development and classification of countries --------------------------------------------- 383
Answer Section ---------------------------------------------------------------------------------------- 390

UNIT 15 KEYNESIAN THEORY OF INCOME & EMPLOYMENT --------------------------------------------- 393

15.1 Circular flow of income ---------------------------------------------------------------------------------------- 393
Answer Section ---------------------------------------------------------------------------------------- 396
15.2 Consumption function ---------------------------------------------------------------------------------------- 398
Answer Section ---------------------------------------------------------------------------------------- 403
15.3 Marginal and average propensities ------------------------------------------------------------------- 404
Answer Section ---------------------------------------------------------------------------------------- 409
15.4 National income equilibrium ----------------------------------------------------------------------------- 412
Answer Section ---------------------------------------------------------------------------------------- 419
15.5 Multiplier (K) --------------------------------------------------------------------------------------------------- 424
Answer Section ---------------------------------------------------------------------------------------- 432
15.6 Accelerator (a) --------------------------------------------------------------------------------------------------- 437
Answer Section ---------------------------------------------------------------------------------------- 440
15.7 Multiple topics of chapter 15 ----------------------------------------------------------------------------- 442
Answer Section ---------------------------------------------------------------------------------------- 444

UNIT 16 MONEY, BANKING & INTEREST RATE DETERMINATION ---------------------------------- 446

16.1 Banking --------------------------------------------------------------------------------------------------- 446
Answer Section ---------------------------------------------------------------------------------------- 446
16.2 Credit Creation --------------------------------------------------------------------------------------------------- 447
Answer Section ---------------------------------------------------------------------------------------- 449
16.3 Money Supply --------------------------------------------------------------------------------------------------- 450
Answer Section ---------------------------------------------------------------------------------------- 454
16.4 Liquidity preference ---------------------------------------------------------------------------------------- 456
Answer Section ---------------------------------------------------------------------------------------- 459
16.5 Changes in interest rate ---------------------------------------------------------------------------------------- 461
Answer Section ---------------------------------------------------------------------------------------- 467

UNIT 17 MONETARY AND DEVELOPMENT POLICIES -------------------------------------------------------- 471

17.1 Quantity Theory of Money ----------------------------------------------------------------------------- 471
Answer Section ---------------------------------------------------------------------------------------- 476
17.2 Macroeconomic policies ---------------------------------------------------------------------------------------- 480
Answer Section ---------------------------------------------------------------------------------------- 492
17.3 Automatic stablizers ---------------------------------------------------------------------------------------- 500
Answer Section ---------------------------------------------------------------------------------------- 503
17.4 Multiple topics of chapter 17 ----------------------------------------------------------------------------- 504
Answer Section ---------------------------------------------------------------------------------------- 513

UNIT 18 EMPLOYMENT AND UNEMPLOYMENT -------------------------------------------------------- 518

18.1 Types of Unemployment ------------------------------------------------------------------- 518
Answer Section ---------------------------------------------------------------------------------------- 520
18.2 Effects of Unemployment ----------------------------------------------------------------------------- 522
 Answer Section ---------------------------------------------------------------------------------------- 524
18.3 Labour force and labour productivity ------------------------------------------------------------------- 525
Answer Section ---------------------------------------------------------------------------------------- 527

UNIT 19 MACROECONOMIC OBJECTIVES AND CONFLICTS --------------------------------------------- 528

19.1 Short run phillips curve ---------------------------------------------------------------------------------------- 528
Answer Section ---------------------------------------------------------------------------------------- 533
19.2 Government macroeconomic aims ------------------------------------------------------------------- 535
Answer Section ---------------------------------------------------------------------------------------- 537
19.3 Approaches of macroeconomics ------------------------------------------------------------------- 538
Answer Section ---------------------------------------------------------------------------------------- 544

UNIT 20 OTHERS ----------------------------------------------------------------------------------------------------------- 552

20.1 Aggregate demand and supply ------------------------------------------------------------------- 552
Answer Section ---------------------------------------------------------------------------------------- 558
20.2 Elasticity ---------------------------------------------------------------------------------------- 561
Answer Section ---------------------------------------------------------------------------------------- 564
20.3 Absolute and percentage values ------------------------------------------------------------------- 566
Answer Section ---------------------------------------------------------------------------------------- 570
20.4 General questions ---------------------------------------------------------------------------------------- 572
Answer Section ---------------------------------------------------------------------------------------- 576

YEARLY PAPERS ------------------------------------------------------------------------------------------------------- 578

March 2017 Paper 32 ------------------------------------------------------------------------------------ 578
Answer Key ---------------------------------------------------------------------------------------- 583

May - June 2017 Paper 32 ------------------------------------------------------------------------------- 584

Answer Key ---------------------------------------------------------------------------------------- 592

October - November 2017 Paper 32 ----------------------------------------------------------------- 593

Answer Key ---------------------------------------------------------------------------------------- 598

May - June 2018 Paper 32 ----------------------------------------------------------------- 599

Answer Key ---------------------------------------------------------------------------------------- 605
Topical Solved A-Level Economics P-3 23 1.1 Law of diminishing marginal utility
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Unit -1 Theory of consumer behaviour

1.1 Law of diminishing marginal utility

1. M/J 15/P33/Q2
The diagram shows the marginal utility (MU) an individual derives from consuming different
quantities of good X.

At the margin, the individual derives two units of utility from every $1 that he spends.
Which quantity of good X will he purchase if the price of X is $2?
A 1 B 2 C 4 D 5

2. O/N 14/P14/Q2
The schedule shows the total utility derived by a consumer of a good X at different levels of consumption.

quantity of X 1 2 3 4 5 6 7
consumed
total utility (units) 30 50 65 75 80 83 84

The consumer obtains two units of utility from the last $ she spends on each good that she purchases.
What is the maximum number of units of X that she will consume if the price of X is $5?
A 3 B 4 C 5 D 6

3. M/J 08/P3/Q2, O/N 13/P3/Q2

The table shows the total utility that an individual derives from consuming different quantities of a good.
quantity of total
good utility
(units) (units)
1 24
2 45
3 63
4 78
5 90
6 99
The individual’s marginal utility of money is $1 = 2 units of utility.
What is the maximum quantity of the good that the individual will buy when its price is $6?
A 2 units B 3 units C 4 units D 5 units
Topical Solved A-Level Economics P-3 24 1.1 Law of diminishing marginal utility
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4. M/J 13/P32/Q2, O/N 05/P3/Q2

The table shows the total utility that an individual derives from consuming different quantities of a good.

quantity of total
good utility
(units) (units)
1 20
2 36
3 50
4 62
5 72
6 80

The individual’s marginal utility of money is $1 = 2 units of utility.

What is the maximum quantity of the good that the individual will buy when its price is $6?
A 2 units B 3 units C 4 units D 5 units

5. M/J 12/P32/Q2, O/N 15/P31/Q2

The table shows the total utility that an individual obtains from consuming different quantities of a good.
Quantity of good total utility
(units) (units)
1 20
2 36
3 50
4 62
5 72
6 80
The individual’s marginal utility of money is $1 = 3 units of utility.
What is the maximum quantity of the good that the individual will buy when its price is $4?
A 2 units B 3 units C 4 units D 5 units

6. O/N 11/P32/Q1, M/J 16/P31/Q4

Why does a normal demand curve for a product slope downwards from left to right?
A Buyers’ additional satisfaction declines as consumption rises.
B Consumers are faced with choices between competing products.
C Sellers are willing to accept lower prices on larger orders.
D The average cost of production falls as the scale of production increases.

7. O/N 10/P32/Q2
The schedule shows the total utility derived by a consumer of a good X at different levels of consumption.

Quantity of X
1 2 3 4 5 6 7
consumed
Total utility (units) 30 50 65 75 80 83 84

The consumer obtains three units of utility from the last $ she spends on each good that she purchases.
What is the maximum number of units of X that she will consume if the price of X is $5?
A 3 B 4 C 5 D 6
Topical Solved A-Level Economics P-3 25 1.1 Law of diminishing marginal utility
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8. M/J 17/P31/Q5, M/J 10/P32/Q1

The diagram shows the marginal utility (MU) that an individual derives from a good at different
levels of consumption.
The utility he derives from the last $ he spends on every good is 3 units.
80
70
60
50
utility
40
(units)
30
20
10 MU
0
1 2 3 4 5 6 7 8
quantity (kilos)
Assuming the marginal utility of money is constant, which quantity will he purchase if the price of the good is $10?
A 4 kilos B 5 kilos C 6 kilos D 7 kilos

9. O/N 09/P32/Q1
The schedule shows the total utility derived by a consumer of a good X at different levels of consumption.

quantity of x consumed 1 2 3 4 5 6 7 8
total utility (units) 28 40 50 58 64 68 71 73

The consumer obtains two units of satisfaction from the last cent she spends on each good that she purchases.
What is the maximum number of units of X that she will consume if the price of X is 6 cents?
A 2 B 5 C 7 D 8

10. O/N 06/P3/Q2

The diagram shows the marginal utility that an individual derives from a good at different levels of
consumption.
The utility he derives from the last $ he spends on every good is 2 units.
80
70
60
50
utility 40
(units) 30
20
10 MU
0
1 2 3 4 5 6 7 8
quantity (units)
Assuming the marginal utility of money is constant, which quantity will he purchase if the price of the good is $20?
A 4 units B 5 units C 6 units D 7 units

11. O/N 04/P3/Q3

What explains the slope of an individual’s demand curve for a normal good?
A market imperfections C diminishing returns
B the law of variable proportions D diminishing marginal utility
Topical Solved A-Level Economics P-3 26 1.1 Law of diminishing marginal utility
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12. O/N 02/P3/Q2

The table shows the marginal utility that a consumer obtains from consuming successive units of good X.

quantity mu (units of
(units) utility)
1 10
2 18
3 24
4 28
5 30
6 31

The price of good X is $4.

What additional information is needed to determine the quantity of X that the consumer will
purchase?
A the consumer’s income elasticity of demand for good X
B the consumer’s price elasticity of demand for good X
C the marginal utility of money to the consumer
D the marginal utility that the consumer obtains from substitute goods
Topical Solved A-Level Economics P-3 27 1.1 Law of diminishing marginal utility
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Answers Section

1. C
According to question, the marginal utility of money is $1 = 2 utils. At price of $2 the marginal utility = 2×2 = 4 utils.
From the diagram, taking 4 utils at vertical axis and using MU curve, the corresponding quantity is 4 units.
2. B
According to question, the marginal utility of money is 1 dollar to 2 utils. At price of 5 dollars the marginal utility = 5x2
= 10 utils. From the table, according to Law of diminishing marginal utility the consumer equilibrium is established
where MU=P. The Marginal Utilities are calculated as below.

quantity of X consumed 1 2 3 4 5 6 7
Total Utility (Utils) 30 50 65 75 80 83 84
Marginal Utility 30 20 15 10 5 2 1
Price (utils) 10 10 10 10 10 10 10

At quantity= 4 MU is 10 therefore according to Law of diminishing marginal utility consumer will buy a maximum 4
units.
3. D
According to question, the marginal utility of money is $1 = 2 utils. At price of $6 the marginal utility = 6x2 = 12 utils.
From the table, according to Law of diminishing marginal utility the consumer equilibrium is established where
MU=P. The marginal utilities are calculated as below

Quantity of good Total Marginal Price

(units) Utilities Utilities (utils)
1 24 24 12
2 45 21 12
3 63 18 12
4 78 15 12
5 90 12 12
6 99 9 12

At quantity 5, MU is 12 and therefore according to Law of diminishing marginal utility consumer will buy a maximum 5
units.
4. C
According to question, the marginal utility of (Law of diminishing marginal utility) money is $1 to 2 utils. At price of $6
the marginal utility = 6×2 = 12 utils. From the table, according to Law of diminishing marginal utility the consumer
equilibrium is established where MU=P. The marginal utilities are calculated as below

Quantity of good Total Marginal Price

(units) Utilities Utilities (utils)
1 20 20 12
2 36 16 12
3 50 14 12
4 62 12 12
5 72 10 12
6 80 8 12

At 4 units of quantity, MU is 12 therefore according to Law of diminishing marginal utility consumer will buy a
maximum 4 units.
Topical Solved A-Level Economics P-3 28 1.1 Law of diminishing marginal utility
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5. C
According to question, the marginal utility of (Law of diminishing marginal utility) money is $1 to 3 utils. At price of $4
the marginal utility = 4×3 = 12 utils. From the table, according to Law of diminishing marginal utility the consumer
equilibrium is established where MU=P. The marginal utilities are calculated as below

Quantity of good Total Marginal Price

(units) Utilities Utilities (utils)
1 20 20 12
2 36 16 12
3 50 14 12
4 62 12 12
5 72 10 12
6 80 8 12

At 4 units of quantity, MU is 12 therefore according to Law of diminishing marginal utility consumer will buy a
maximum 4 units.
6. A
The demand curve can be linked to marginal utility theory. As a consumer consumes more a product its marginal
utility (utility from an additional unit) falls so a consumer is willing to pay a lower price for the product. Lower the
marginal utility obtained from a good, the lower the price a consumer will be willing to pay for a product. Although the
statement in option B is correct, in the sense that consumers are faced with choices between competing goods, it
does not explicitly state why this leads to a downward sloping demand curve. Option C and D refer to the supply
curve.
7. A
As MU of money is $1=3 utils, the marginal utility table is as follows.

quantity of X consumed 1 2 3 4 5 6 7
Total Utility (utils) 30 50 65 75 80 83 84
Marginal Utility (MU) 30 20 15 10 5 2 1
Price (utils) 15 15 15 15 15 15 15

At price = $5, Converting $ to utils, Price = 5×3 = 15 utils. According to Law of diminishing marginal utility consumer
equilibrium is established where MU = P.
Therefore maximum quantity is 3.
8. C
According to question, the marginal utility of money is $1 = 3 utils. For consumer equilibrium MU=P. At price of $10
the marginal utility should be = 10×3 = 30 utils. From the diagram, taking 30 utils at vertical axis and using MU curve,
the corresponding quantity is 6 units.
9. A
According to question, the marginal utility of money is 1 cent to 2 utils. At price of 6 cents the marginal utility = 6x2 =
12 utils. From the table, according to Law of diminishing marginal utility the consumer equilibrium is established
where MU=P. The Marginal Utilities are calculated as below

Quantity of good
1 2 3 4 5 6 7 8
(units)
Total Utilities 28 40 50 58 64 68 71 73
Marginal Utilities 28 12 10 8 6 4 3 2
Price (utils) 12 12 12 12 12 12 12 12

At quantity= 2 MU is 12 therefore according to Law of diminishing marginal utility consumer will buy a maximum 2
units.
Topical Solved A-Level Economics P-3 29 1.1 Law of diminishing marginal utility
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10. B
According to question, the marginal utility of money is $1 = 2 utils. At price of $20 the marginal utility = 20×2 = 40
utils. From the diagram, taking 40 utils at vertical axis and using MU curve, the corresponding quantity is 5 units.

80
70
60
50
utility 40
(units) 30
20
10 MU
0
1 2 3 4 5 6 7 8
quantity (units)
11. D
Demand curve shows negative relationship between price and quantity demanded. According to LDMU (Law of
diminishing marginal utility), consumer equilibrium is at MU=P. With the established consumer equilibrium at every
quantity MU=P, the marginal utility becomes a demand curve. The marginal utility curve helps to explain the negative
relationship that with the increase in consumption of product MU declines and so does the price that consumers are
ready to pay.
12. C
According to Law of Diminishing Marginal Utility, consumer equilibrium is established where MU= P. In order to
equate the marginal utility and price and find the quantity where consumer equilibrium will be established, marginal
utility of money is needed, i.e., utils per $ spent. MU is measured in utils and price is measured in currency, therefore
they can’t be equated without a given MU of money.