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dr Adrian Solek, Department of Microeconomics, Cracow University of Economics

1. Helen spends her pocket money equal to 120 zł on two goods: f) What is the slope of the line? If Jeremy spends all his
strawberries and yoghurt. money on the two goods and makes no savings, what is
a) The price of strawberries is 10 zł per kilogram and the the opportunity cost of buying one more newspaper?
price of yoghurt is 5 zł per litre. Draw the budget line and
20
write its equation. What is the slope of the line?

quantity of juice (litres)

b) Suppose Helen is planning to spend all her money. If she
wanted to increase the consumption of strawberries by 1 15
kg, what would be the opportunity cost of this decision?
c) How will the graph change after an increase of the price 10
of strawberries to 20 zł? Write the new equation. What is
the slope of the line?
5
d) What is the opportunity cost of buying one more kilogram
of strawberries?
e) Helen’s income has changed. Now she can buy e.g. 6 kg 0
of strawberries and 8 litres of yoghurt and spend all her 0 5 10 15
money. What is her income? Assume the prices like in quantity of newspapers
part c).
f) Draw the new budget line. What is its equation and slope? 4. We can assume that utility can be measured in numbers. For
the following functions check whether the law of diminishing mar-
36
ginal utility holds true (for non-negative quantities of the good).
quantity of yoghurt (litres)

32 2
28 a) MU =
𝑄+6
24 b) MU = 24 – 3Q
20 c) The function in the table:
16
Q U(Q)
12
0 0
8 10 50
4 20 90
0 30 120
0 2 4 6 8 10 12 14 16 40 140
quantity of strawberries (kilograms) 50 150
d) U = 5√𝑄
2. The graph shows the budget line of a consumer buying two
goods: apples and oranges. e) U = –0.4Q2 + 8Q

6 5. Jolene buys curry and tonic. Match the sentences below to

5 points on the graph.
quantity of oranges (kg)

4 B G
3
2
quantity of tonic

1
F
0
0 1 2 3 4 5 6 7 D

quantity of apples (kg) A

E
a) Which good is cheaper? Why do you think so?
b) The price of the more expensive good decreased to the level H
of the price of the other good. Draw the new budget line. C
c) Now the consumer’s income decreased by one half. quantity of curry
Draw the new budget line (at prices like in part b).
d) If the income is $45, what are the prices of the fruit? i. Jolene buys only tonic.
ii. Jolene buys only curry.
3. The diagram shows Jeremy’s budget line. iii. A bundle that gives maximum possible total utility.
a) What is the maximum amount of newspapers he can buy? iv. Jolene saves some money.
b) How much juice can he afford? v. A bundle worse than D and unaffordable.
c) Which good is more expensive? vi. A bundle better than D and unaffordable.
d) If the price of juice is €4 per liter, what is Jeremy’s in- vii. A bundle whose cost is equal to the income and contain-
come? What is the price of a newspaper? ing both goods, but not optimal.
e) Write the equation of the budget line. viii. A bundle as good as D and unaffordable.
6. The graph shows five indifference curves of a consumer who
buys coke and popcorn.
12
11
10
9
quantity of popcorn

8
7
6
5
4
3
2
1
0 5
0 1 2 3 4 5 6 7 8 9 10 11 12
quantity of coke 4

price of tickets
U1 U2 U3 U4 U5 3

a) The income of the consumer is $240, the price of coke is 2

$24 and the price of popcorn is $60. Write the equation
of the budget line and draw the line on the graph. 1
b) Which bundle maximizes the consumer’s total utility?
c) The prices of both goods changed and are equal to $30. 0
Write the equation of the new budget line. 15 20 25 30 35
d) What is the new optimal bundle? quantity of tickets
e) Now the income of the consumer increased by 50% and the
prices are like in part c). How will the budget line change?
11. Karen spends all
f) What about the bundle that maximizes the total utility?
her pocket money on
7. Edwin buys two goods: potatoes and Greek salad, and mar-
biscuits and tea. Her 20
income is 320 zł. The
ginal utilities from their consumption are: MUP = 8 – 2QP and
consumer equilibria are
MUG = 10 – QG, respectively. Edwin’s income is £220, the price
presented on the graph.
of potatoes is £5 and the price of Greek salad is £20. What com-
a) What is the price
bination of the goods maximizes Edwin’s total utility? of biscuits when
Karen is at point
8. The total utility function is U = QX3/4QY1/4. The prices of the A? How many
goods are: PX = 10, PY = 20 and the consumer’s income is $480. biscuits does she
Find the consumer equilibrium. buy?
b) What is the price
9. Emma buys bread at $2 per loaf and milk at $3 per litre. At of biscuits when Karen is at point B? How many biscuits
present she is buying these two products in amounts such that does she buy?
the marginal utilities from the last units purchased are 40 (for c) Draw her curve of demand for biscuits in the graph below.
bread) and 75 (for milk). d) Calculate the price elasticity of demand for biscuits (start-
a) What is the additional utility generated by one more dollar ing from the higher price).
spent on bread? And by one dollar spent on milk? e) Calculate the mixed elasticity of demand for tea with re-
b) Is Emma buying the optimal bundle? spect to the price of biscuits (starting from the higher price).
c) If not, how should she reallocate her expenditures be- What is the relationship between the two goods?
tween the two goods and why? f) What is the price of tea?
g)
10. Winston spends all his salary (£120 per month) on horse 50
races and pudding. In April a ticket for the races cost £2, in May 45
£3, and in June £4. The price of pudding remained unchanged 40
price of biscuits

at the level of £3. 35

a) Write equations of budget lines in April, May and June. 30
b) Find the equilibrium points in the graph. How many tick- 25
ets did Winston buy in April, May and June? 20
c) Now, using the results from part b) above, draw Win- 15
ston’s linear demand curve for the horse races. 10
5
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
© Adrian Solek quantity of biscuits