Question One:
Assume Susan has $80 to spend on candies and chips each week and both goods must be purchased whole units (no fraction). The price of candies is $8 each and chips is $20.
CANDIES CHIPS
# of cans Total Utility (TU) Marginal Utility (MU)
MU/P
Consumer Surplus # of cans Total Utility (TU) Marginal Utility (MU)
MU/P
Consumer Surplus
1 50 1 22
2 30 2 20
3 100 3 10
4 10 4 5
5 116 5 60
6 5 6 2
7 2 7 63
a) Copy and complete the tables. (6 marks)
b) Are these figures consistent with the law of diminishing marginal utility? Given the budget of $80,what quantity of candies and chips will maximize Susan’s level of satisfaction? (2 marks)
c) Draw the graphs of total and marginal utility on the same graph. (4 marks)
d) Explain the “Law of Diminishing Marginal Utility”. (3 marks)
Question Two
The table below shows the price and quantities demanded of restaurant meals by two groups of professionals during restaurant week. One group earns $20,000 per week and the other earns $30,000 per week:
Price of Restaurant Meals
Professionals who earn $20,000 per week Professionals who earn $30,000 per week
$400 30 50
$500 24 42
$600 16 36
$700 8 30
A. Using the midpoint method, calculate the price elasticity of demand for both groups when the price of a restaurant meals increase from $400 to $500, $500 to $600 and $600 to $700. (6 marks)
B. Explain the answers for different types of elasticities you arrived at in part A: (3 marks)
C. List four (4) factors that influence the Price Elasticity of Demand for any product
(4 marks):
D. Distinguish between Normal Goods and Inferior Goods (2