BK013 Principles of Economics 1

Tutorial 4 – Semester 1 – 2018

Multiple Choice Questions

1. The Law of Diminishing Marginal Utility states that ___________________.

A. the more one has of anything the less one wants more of it
B. as more of a commodity produced, the price of the commodity will fall
C. the satisfaction obtained from the consumption of a commodity diminishes
D. as more of a commodity is consumed the total satisfaction rises and then fall

2. Income consumption curve for a normal product has __________________.

A. a vertical slope
B. a positive slope
C. a negative slope
D. a horizontal slope

3. The indifference curve is ________________.

A. convex to the origin
B. parallel to the axis
C. a straight line sloping downward
D. None of the above.

4. Which of the following statements concerning the relationship between total utility
(TU) and marginal utility (MU) is NOT TRUE?
A. TU continues to rise as long as the MU is rising.
B. When TU is increasing, MU will be positive.
C. TU reaches a maximum when the MU becomes zero.
D. When TU is decreasing, MU will be negative.

5. Which of the following statements is possible?

A. Total utility decreases when marginal utility is zero
B. Total utility increases when marginal utility is positive
C. Total utility decreases when marginal utility is positive
D. Total utility increases when marginal utility is negative

6. A complementary explanation of the downward-sloping demand curve is given by

_________________.
A. decreasing costs
B. diminishing returns
C. decreasing returns to scale
D. diminishing marginal utility

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PREPARED BY: GEYATHIRI GOPI
BK013 Principles of Economics 1
Tutorial 4 – Semester 1 – 2018

7. Marginal utility ___________________.

A. is zero when total utility is at minimum
B. increases as more of a product is consumed
C. decreases as more of a product is consumed
D. is equal to total utility divided by the number of units consumed

8. Total utility is maximum when marginal utility is _________________.

A. zero
B. positive
C. negative
D. maximum

9. Consumer surplus is the difference between _______________________.

A. revenue and cost
B. factor cost and market price
C. marginal utility and total utility
D. potential price and market price

10. Marginal utility is a measure ______________________.

A. determined strictly by interactions of supply and demand
B. of the total utility derived from consuming marginally beneficial goods
C. computed by dividing the total utility by the number of units of a good consumed
D. of the additional utility derived through the consumption of an additional unit of the
same good

11. As consumption increases, marginal utility will become lesser. This statement describes
______________________.
A. the law of diminishing returns
B. the law of equi-marginal utility
C. economies and diseconomies of scale
D. the law of diminishing marginal utility

12. When the marginal utility is negative, the total utility ____________________.
A. is zero
B. increases
C. decreases
D. is at its maximum

13. The Law of Diminishing Marginal Utility implies that as a person consumes more and
more of a good in given period ______________________.
A. total utility will decline
B. marginal utility will decline
C. total utility will fall and then rise
D. marginal utility becomes negative

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PREPARED BY: GEYATHIRI GOPI
BK013 Principles of Economics 1
Tutorial 4 – Semester 1 – 2018

14. An indifference curve shows ______________________________.

A. the optimal consumption between two goods
B. the combination of goods giving equal utility to a consumer
C. the maximum utility that can be achieved for a given consumer budget
D. the maximum utility that can be achieved for different amounts of goods

15. The forth glass of milk does not generate as much satisfaction as the third glass. This
exemplifies ____________________.
A. consumer surplus
B. diminishing total utility
C. diminishing marginal utility
D. marginal rate of substitution

16. Consumer’s surplus is defined as the _________________________.

A. sum of what the consumer pays and what he is willing to pay
B. what the consumer is willing to pay divided by what he actually pays
C. difference between what the consumer actually pays and he can afford to pay
D. difference between what the consumer is willing to pay and what he actually pays

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PREPARED BY: GEYATHIRI GOPI
BK013 Principles of Economics 1
Tutorial 4 – Semester 1 – 2018

Structured Questions

1. Wong consumes two products, Good Crazy and Good Mad. Assume the price of Good
Crazy is RM8.00 and price of Good Mad is RM4.00.

Quantity Good Crazy Good Mad

(units) Total Marginal MU/P Total Marginal MU/P
Utility Utility Utility Utility
1 56 (iii) 7 32 (ix) 8
2 104 48 (v) (vii) 28 (xi)
3 (i) 32 (vi) 84 (x) 6
4 160 (iv) 3 (viii) 20 (xii)
5 (ii) 10 1.25 116 12 3

a) Provide the correct answers for:

(i) ______ (v) ______ (ix) _______
(ii) ______ (vi) ______ (x) _______
(iii) ______ (vii) ______ (xi) _______
(iv) ______ (viii) ______ (xii) _______

b) Assume that Wong has RM52.00 to spend. How many units of Good Crazy and
Good Mad should Wong buy to maximize his utility?

c) What is the Total Utility received by Wong at equilibrium?

d) If Wong’s income were decreased to RM28.00, what quanties of Good Crazy and
Good Mad should be purchased to maximize her utility?

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PREPARED BY: GEYATHIRI GOPI
BK013 Principles of Economics 1
Tutorial 4 – Semester 1 – 2018

2. Table below shows Total Utility for Good Nonsense and Good Stuff. Given the price of
Good Nonsense is RM1 and the price of Good Stuff is RM2.

Quantity Good Nonsense Good Stuff

(units) Total Marginal MU/P Total Marginal MU/P
Utility Utility Utility Utility
1 10 (iii) 10 (vii) 22 (xi)
2 (i) 9 (v) 42 (ix) 10
3 25 (iv) 6 (viii) 16 (xii)
4 (ii) 4 (vi) 70 (x) (xiii)

a) Provide the correct answers for:

(i) ______ (v) ______ (ix) ______ (xiii) ______
(ii) ______ (vi) ______ (x) ______
(iii) ______ (vii) ______ (xi) ______
(iv) ______ (viii) ______ (xii) ______

b) Suppose that the consumer has RM11 to be spent on both goods. Determine the
combination of Good Nonsense and Good Stuff that maximizes utility.

c) Based on your answer in (b), find the Total Utility received by the consumer.

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PREPARED BY: GEYATHIRI GOPI
BK013 Principles of Economics 1
Tutorial 4 – Semester 1 – 2018

3. Sinamika consumes Good Happy and Good Fun. She has only RM22 to spend on these
goods. Suppose that the prices of Goods Happy and Good Fun are both RM2.

Good Happy Good Fun

Quantity Marginal Marginal
Total Marginal Total Marginal
(units) Utility Utility
Utility Utility Utility Utility
per RM per RM
1 10 (iii) 5 (ix) 16 (xv)
2 (i) 9 (vi) 30 (xii) 7
3 27 (iv) 4 42 12 (xvi)
4 34 7 (vii) (x) 10 5
5 (ii) 6 3 60 (xiii) 4
6 45 (v) 2.5 66 6 (xvii)
7 49 4 (viii) (xi) (xiv) 2

a) Provide the correct answers for:

(i) _____ (vi) _____ (xi) _____ (xvi) _____
(ii) _____ (vii) _____ (xii) _____ (xvii) _____
(iii) _____ (viii) _____ (xiii) _____
(iv) _____ (ix) _____ (xiv) _____
(v) _____ (x) _____ (xv) _____

b) How many units of Goods Happy and Fun should Sinamika buy to maximize her
utility?

c) Based on your answer in (b), what is the Total Utility received by Sinamika?

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PREPARED BY: GEYATHIRI GOPI