1MS040 Week Two: Consumer Choice

Practice Questions

(1) Describe some of the different things you do with water. Which would you give
up if the price of water rose a little? If it rose by a fairly large amount? If it rose by a
very large amount?

(2) Which is greater: your total utility from twelve litres of water per day or your total
utility from eighteen litres per day? Why?

(3) Which is greater: your marginal utility at twelve litres per day or your marginal
utility at eighteen litres per day? Why?

(4) Some people who do not understand the optimal purchase rule argue that if a
consumer buys so much of a good that its price equals its marginal utility, he or she
could not be behaving optimally. Rather, they say, he or she would be better off
quitting when ahead, that is, buying a quantity such that marginal utility is much
greater than price. What is wrong with this argument? (HINT: what opportunity does
the consumer than miss? Is it maximization of marginal or total utility that serves the
consumer’s interest?)

#kg Total Utility Marginal Utility

0 0
1 1.20 1.20
2 2.32 1.12
3 3.20 0.88
4 3.92 0.72
5 4.28 0.36
6 4.44 0.16
7 4.52 0.08
8 4.52 0
(5) Using the table about bananas above; what is the loss in consumer surplus if the
price rises from 72p to 88p per kilogram of bananas?

(6) What inferior goods do you buy? Why do you buy them? Do you think you will
continue to buy them when you win the lottery?

(7) Which of the following items are likely to be normal goods for a typical
consumer? Which are likely to be inferior goods?
A; expensive perfume
B; paper napkins
C; second-hand clothing
D; overseas trip

(8) John Q. Public spends all his income on cheap wine and hot dogs. Draw his
budget line when:
A; his income is £80 and the cost of one bottle of wine and one hot dog is £1.60 each.
B; his income is £120 and the two prices are as in (A).
C; his income is £80 and hot dogs cost £1.60 and wine costs £1.20 per bottle.
(9) Around 1850, Sir Robert Giffen observed that Irish peasants actually consumed
more potatoes as the price of potatoes increased. Explain this.

(10) Draw some hypothetical indifference curves for John Q. Public on a diagram
identical to the one you constructed for part (A) above.
(a) Approximately how much wine and how many hot dogs will J. Q. Public buy?
(b) How will these choices change if his income increases to £120, as in part (B)
above. Is either good an inferior good?
(c) How will these choices change if wine prices fall to £1.20 per bottle, as in part (C)
above?

(11) Explain what information the slope of an Indifference Curve conveys about a
consumer’s preferences. Use this to explain the typical U-shaped curvature of
indifference curves.