The Copperbelt University

School of Business
Department of Economics

ES 120: Introduction to Economics Tuesday, October 09, 2017

Problem Set Four

1. The data in the Table 1 below shows the utility that Kaoma obtains from consuming
apples.
Table 1: Kaoma’s Daily Utility from Consuming Apples
Number of apples Total utility
consumed (utils per day)
0 0
1 7
2 11
3 13
4 14
5 14
6 13
a) Briefly explain what the data shows.
b) Calculate the marginal utility obtained from the consumption of apples.
c) Draw the total and marginal utility curves on the same graph.
d) Use the results in the graphs above to explain the “law of diminishing marginal
utility”.

2. Suppose that the consumer has the total utilities derived from the consumption of
goods and of Table 2. Suppose further that the consumer has money income of
K10 while the prices of goods and are K2 and K1 respectively.
Table 2: Total Utilities of Consuming Goods and
Units of and 1 2 3 4 5 6 7 8 9 10
Total Utility ( 14 26 37 47 56 64 70 74 77 78
Total Utility 13 24 34 42 49 55 58 60 60 55

a) Determine the utility maximisation quantities of the two goods and .

b) Prove that all the money income is being exhausted at the utility maximising
quantities.
c) What is the total utility at the optimal level of consumption?
d) Derive the demand curves for both goods.

3. Sketch a consumer’s indifference map for two goods and . Mark the optimum
consumption point. Now illustrate the following on separate diagrams for each:
a) A rise in the price of good , but no change in the price of good .
b) A shift in the consumer’s tastes from good to good .
c) A fall in the consumer’s income.
d) A fall in the price of good .

1
4. Chinga has an income of K12 a week. Popcorn costs K3 a bag, and cola costs K3 a
can.
a) What is Chinga’s real income in terms of cola?
b) What is his real income in terms of popcorn?
c) Determine the equation for Chinga’s budget line.
d) Draw a graph of Chinga’s budget line with cola on the x-axis.
e) In part (c), what is the slope of Chinga’s budget line? What does it represent?
f) Impose an indifference curve on the budget line to show how Chinga would
ensure that he is maximizing his utility.
g) Suppose the price of cola reduces to K2, draw the new budget line.
h) Predict what Chinga’s decision would be given the change in part (g) above.
i) In part (g), what is the slope of Chinga’s budget line?
j) Impose an indifference curve on the new budget line to show how Chinga would
ensure that he is maximizing his utility.
k) Below the graph showing the two optimal points, derive the demand curve
graphically.
l) Explain and graphically show the impact of doubling Chinga’s income on the
equilibrium.