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Term 1, AY2016-17

ECONONE Second Long Exam Reviewer1


Utility Maximization. Show all solutions. Please highlight (encircle of put a box around) all final
answers
1.Kylie spends her income of $150 per week on two goods: movies (which cost $5 each) and books
(which cost $10 each). At her current level of consumption, the marginal utility from the last
movie consumed is 20 and the marginal utility from the last book consumed is 30. Is Kylie
maximizing her utility? Why or why not? If not, what should Kylie do to achieve a higher level
of utility?
2. Matilda receives $8 per day to purchase lunch. She spends lunch on bagels (which cost $1 each)
and soda (which costs $1 per bottle). Draw Matildas budget constraint. Put the bagel on the yaxis and the soda on the x-axis. If the price of the bagel falls to $0.75, what will happen to
Matildas budget constraint? Illustrate in the same graph.
In a separate graph, illustrate what will happen to Matildas budget line if her allowance
decreases to $5 per day. Assume that the price of bagel remains to be $1 each and the price of
soda is $1 each before and after Matildas allowance declined.
3. Frank is splitting his time between two activities, basketball and going to the club, per week to
maximize total utility. Suppose that its costs $3 to get into the club and $6 to go to a basketball
game. Furthermore, after paying the rent and taking care of other expenses, Frank has only $21
left over to spend on entertainment. Find the optimal allocation of Franks entertainment budget
by answering the questions below.
Complete Table 1 and refer to its values to respond to the succeeding questions.
No. of Units
1
2
3
4
5
6

Trips to the Club per Week (C)


Marginal
MUC
Total Utility
Utility
PC
12
22
28
32
34
34

Basketball Games per Week (B)


Marginal
MUB
Total Utility
Utility
PB
21
33
42
48
51
51

a. If the initial allocation of Franks entertainment budget is two trips to the club (2C) and three
basketball games (3B) per week, is he maximizing his utility? Why or why not?

b. What combination of trips to the club and basketball games per week would maximize Franks
utility given his budget constraint? What is Franks total utility given this combination?

c. Show graphically how Franks opportunity set would change if real income was to increase to
$42. In one graph, draw the opportunity sets for real income equal to $21 and real income equal
to $42. Put trips to the club on the x-axis and basketball games on the y-axis. Next, draw the
indifference curve which contains the utility maximizing combination of trips to the club and
basketball games when real income is equal to $21 on the same graph. Label all axes, curves, and
coordinates. At real income equal to $42, would the initial optimal point in letter b still hold?
Why or why not?

1 Please note that problem numbers 1 to 3 are adapted from Case, K. and Fair, R. (2007). Principles of Economics
(8th edition.). Singapore: Prentice Hall, Inc.

Term 1, AY2016-17

4. Use Figure 1 to determine the answers to the succeeding questions.

4.1 Assuming no budget constraint, at which indifference curve is the consumers total utility the
highest in consuming shakes and pizzas achieved? Does this indifference curve contain the
bundle of good that would maximize the consumers utility in consuming shakes and pizzas?
Justify your answer.
4.2 If the goal is to maximize utility given a particular budget, would the consumer choose to
consume the combination of shakes and pizzas represented by point D? Why or why not?
4.3 If the goal is to maximize utility given a particular budget, would the consumer choose to
consume the combination of shakes and pizzas represented by point E? Why or why not?
4.4 Points C and D are on the same indifference curve. What does this tell us about the utility
generated at these points? Explain.
4.5 Identify the utility maximizing bundle of goods for this consumer. Theoretically, why is this
said to be the combination of shakes and pizzas that would yield the highest utility for the
consumer given a specific budget?

Source: Figure 1. Utility Maximization. Adapted from Utility Maximization. Retrieved on 16 September 2012 from
http://courses.byui.edu/ECON_150/ECON_150_Old_Site/images/5-2_Indifference_Curves_08.jpg