Microeconomics

Group Assignment I

Maximum mark 15%

Submission Date, June 25/2021

The maximum number of group should be 7 and the minimum 6.

The number of student in each group must be minimum of 5 and maximum of 10.

1. Define utility

2. What are the two approaches to measure utility?

3. What are the assumptions underlying the cardinal approach?

4. What are the limitations of Cardinalist theory?

5. Assume a hypothetical consumer consumes good X and good Y. The price of good X is 1 and
price of good Y is 3 and the consumer budget is birr 10 for the two goods. Where: QX is quantity
of good X, QY is quantity of good Y and TUX and TUY is total utility from consuming good X
and good Y respectively.

QX TUX QY TUY
0 0 0 0
1 10 1 24
2 19 2 45
3 27 3 63
4 34 4 78
5 40 5 87
6 44 6 90

Based on the given information, answer the following questions.

a. Compute the marginal utility of the two goods

b. At what amounts of consumption does diminishing marginal utility starts to occur for the two
goods?

c. Determine the quantities of the two goods that the consumer should buy in order to maximize
his total utility.

6. What is the relationship between total utility and marginal utility?

7. What are the assumptions underlying the Ordinal approach?

6. What are the major properties of indifference curves?

7. Suppose a consumer has income of 200 birr per month and he wants to spend all of his income
on two goods, X and Y, whose prices are birr 4 and birr 5 respectively. Based on this information
answer the following questions:

a. Express the budget line of the consumer both algebraically and diagrammatically.

b. Compute the equation of the budget line.

c. Determine the slope of the budget line and interpret the result

e. What will happen to the original budget line?

i. If money income doubles.

ii. If the price levels increases by 50%.

iii. If price of good Y doubles

Iv if the price of both good double