Long Questions

1.The following two tables illustrate Ezgi’s total utilities from spending on earrings (e) and
bags (b). Suppose that Ezgi has a monthly budget of 36000 TL, each earrings cost 6000 TL,
and each bag costs 3000 TL.

a. Fill in the figures for marginal utility and marginal utility per TL for both earrings and
bags.
Q(e) TU(e) MU(e) MU(e)/P(e) Q(b) TU(b) MU(b) MU(b)/P(b)
0 0 0 0 0 0 0 0
1 200 200 0.033 1 250 250 0.083
2 290 90 0.015 2 295 45 0.015
3 370 80 0.013 3 335 40 0.013
4 440 70 0.011 4 370 35 0.011
5 500 60 0.01 5 400 30 0.01
6 550 50 0.008 6 425 25 0.008
7 590 40 0.006 7 445 20 0.006

b. Are Ezgi’s preferences consistent with the “law of diminishing marginal utility”? Explain
briefly.
Yes, these figures are consistent with the law of diminishing marginal utility, which states that
as the quantity of a good consumed increases, utility also increases, but by less and less for
each additional unit. In the tables, the TU figures for both earrings and bags are increasing,
but as earrings or bags are consumed, the MU diminishes.

c. Given her budget of 36000 TL, what combination of earrings and bags will maximize
Ezgi’s level of satisfaction.
(Pe*Qe)+( Pb*Qb)=36000 (6000*Qe)+(3000*Qb)=36000
To maximize level of satisfaction ; MU(e) / MU(b)= Pe / Pb must hold.
This holds for folowing pairs of earrings and bags ; (2,2), (3,3),(4,4), (5,5),(6,6) and (7,7). But
also the budget equation (1) must hold. This holds when 4 units of both goods are
consumed. 4 earrings and 4 bags should Ezgi consume to maximize her satisfaction.

d. Suppose that the prices of both earrings and bags drop to 1000TL while Ezgi’s shopping
budget shrinks to 10000TL. How much of each good will Ezgi consume to maximize her
level of satisfaction.
The table below shows the changes when the price of both goods drop to 1000 TL. The
equation MU(e)/P(e)= MU(b)/ P(b) holds 7 earrings and 3 bags. This combination costs
10000 TL. This bundle exactly uses up Ezgi’s income.

Q(e) TU(e) MU(e) MU(e)/P(e) Q(b) TU(b) MU(b) MU(b)/P(b)

0 0 0 0 0 0 0 0
1 200 200 0.2 1 250 250 0.25
2 290 90 0.09 2 295 45 0.045
3 370 80 0.08 3 335 40 0.04
4 440 70 0.07 4 370 35 0.035
5 500 60 0.06 5 400 30 0.03
6 550 50 0.05 6 425 25 0.025
7 590 40 0.04 7 445 20 0.02
2. Suppose that Mrs. Diyar allocates all her income on food and shelter. The price of food is
2 TL and the price of shelter is 4 TL per unit. Suppose further that the following equations
represent the marginal utilities of food and shelter, respectively.
MUF = 24 – 2F
MUS = 80 – 8S
where F and S represent the quantity of food and shelter consumed, respectively and MU F
and MUS are measured in million utils. If Mrs. Diyar’s income is 48 YTL, how many units of
each good should she purchase to maximize her total satisfaction?

(PF x F) + (PS x S) = Income 2F + 4S = 48 F= 24 – 2S

MUF/PF = MUs/Ps (24 – 2F)/2 = (80 - 8S)/4 48 – 4F = 80 – 8S

48 – 4(24 – 2S) = 80 – 8S S = 8 units => F = 8 unit

3. Give a brief description of the law of diminishing marginal utility and use it to
explain the downward slope of the demand curve.

Utility is a subjective notion in economics, referring to the amount of satisfaction a

person gets from consumption of a certain product. Marginal utility refers to the extra
utility a consumer gets from one additional unit of a specific product. In a short period of
time, the marginal utility derived from successive units of a given product will
decline. This situation is known as diminishing marginal utility. The law of
diminishing marginal utility can be used to explain the downsloping demand curve.
Consumer wants are insatiable, in general, but wants for specific products can be
satisfied. The more units of a product that a consumer obtains, the less he or she
will want additional units of that product because additional units provide less and
less satisfaction. The only way to get a consumer to purchase more units of a product
is to drop the price. What applies to the individual consumer also applies to
consumers as a group. Hence, there is an inverse relationship between price and
quantity demanded.

4. In the ultimatum game, a proposer offers $8 out of $10 to themselves and $2 to

another player. The responder rejects the offer, leaving both with nothing. Does this
behavior align with traditional economic models? Why or why not?

Answer:
This behavior does not align with traditional economic models, which predict the
responder would accept any positive offer to maximize income. Traditional models
assume individuals are fully rational and utility-maximizing. However, the rejection
highlights the role of fairness and social norms in decision-making. Behavioral
economics explains this as a willingness to sacrifice personal gain to punish perceived
unfairness, demonstrating the importance of non-monetary factors like equity and
justice.
Multiple Choice Questions

1. If Marginal Utility is zero

a. total utility increase when the consumer consumes more of this good.
b. Total utility is also zero.
c. total utility is maximized
d. total utility increase when the consumer consumes less of this good.

2. Ali enjoys consuming cholate bars. The value he places on his consumption of cholate
bars equals
a. marginal utility multiplied by price.
b. price multiplied by the quantity demanded.
c. marginal utility divided by price.
d. his total expenditure on cholate bars plus his consumer surplus.

3. If a demand curve is upward sloping

a. it must be a normal good, with an income effect larger than substitution effect.
b. it must be an inferior good, with a substitution effect that is larger than the income effect.
c. it must be a normal good, with a substitution effect that is larger than the income effect.
d. it must be an inferior good, with an income effect larger than substitution effect.

4. What do economists mean when they say there is "market failure"?

a. Business has introduced a product that consumers do not
want.
b. Free markets have led to excessive profits.
c. Markets have surpluses or shortages so that government rationing is
necessary.
d. Free markets yield results that economists do not consider socially
optimal.

5. All of the following are considered sources of market failure except:

a. public goods.
b. imperfect information.
c. profit-maximizing behavior.
d. externalities.
6. The government of Southland wants to improve resource allocation in the country.
Which of the following actions by the Southland government is most likely to
accomplish this?
a. weakening enforcement of laws and contracts.
b. Promising to cover every risk of loss for private
firms.
c. Coercing all firms to innovate and invest.
d. Taxing polluters and subsidizing firms that are creating significant positive
externalities.

7. The law of diminishing marginal utility implies that:

a. A consumer always spends more on goods with higher marginal utility.
b. Additional units of a good provide less additional satisfaction.
c. Total utility decreases as consumption increases.
d. Marginal utility increases with each additional unit consumed.

8. What is the primary critique of the principle of rational choice in real-world decision-
making?
a. Decisions are always based on emotions.
b. Decisions are made without considering opportunity costs.
c. Decisions often have costs, and individuals use bounded rationality.
d. Individuals always follow default rules.

9. If a consumer spends their entire budget on two goods, their consumption bundle must:
a. Lie inside the budget line.
b. Lie outside the budget line.
c. Lie on the budget line.
d. Satisfy MUX=MUYMU_X = MU_YMUX=MUY.

10. Which of the following is true about marginal utility (MU) and total utility (TU)?
a. Marginal utility increases as total utility decreases.
b. Total utility is the sum of marginal utilities from each unit consumed.
c. Marginal utility is always positive if total utility increases.
d. Total utility is maximized when marginal utility equals price.

11. A consumer maximizes utility when:

a. Total utility is equal for all goods.
b. Marginal utility per dollar spent is equal across all goods.
c. Marginal utility is maximized for at least one good.
d. Total utility equals the budget constraint.
12. Negative marginal utility occurs when:
a. The consumer derives less satisfaction from additional consumption.
b. The total utility from consumption starts to decrease.
c. The price of the good exceeds its utility.
d. Consumption is limited by the budget constraint.

13. When total utility reaches a maximum:

a. Marginal utility is at its maximum.
b. Marginal utility is zero.
c. Marginal utility is negative.
d. Total expenditure equals consumer surplus.

14. If marginal utility is declining but still positive, what happens to total utility?
a. Total utility decreases.
b. Total utility remains constant.
c. Total utility increases at a decreasing rate.
d. Total utility increases at an increasing rate.

15.Your friend tells you economics doesn't make sense because the price of a small
diamond is a lot more than a gallon of water. Everyone needs water, but we can all do
without a diamond. What type of analysis helps you explain why this is so?

A) welfare analysis
B) mental incompetence theory
C) marginal analysis
D) taxation theory

16. What does the "status quo bias" imply about decision-making?
a. People actively seek the best alternatives among all available options.
b. People often stick with the default option due to cognitive or effort constraints.
c. Rational individuals never rely on defaults when better options exist.
d. Defaults have no influence on economic decisions.

17. Which rule of thumb often leads to upward-sloping demand curves?

a. Status quo bias
b. Follow the leader
c. You get what you pay for
d. Conspicuous consumption
True False Questions

1. The law of diminishing marginal utility implies that as more units of a good are consumed,
the additional satisfaction derived from each additional unit decreases.
Answer: True

2. To maximize satisfaction, a consumer should allocate their budget such that the marginal
utility per dollar spent is equal across all goods.
Answer: True

3. The law of demand can be derived from the principle of rational choice, but only when the
income effect and substitution effect both work in the same direction.
Answer: False (The law of demand can hold even if the income and substitution effects differ
in magnitude but work together.)

4. A consumer is maximizing utility when their budget is fully spent and the total utility from
each good is equal.
Answer: False (Utility is maximized when the marginal utility per dollar spent is equal, not the
total utility.)

5. If the price of a good rises and the consumer reduces consumption of that good, the
marginal utility of the last unit consumed must increase to restore equilibrium.
Answer: True

6. Fairness considerations in the ultimatum game indicate that individuals act

irrationally because prioritizing fairness results in rejecting a utility-maximizing offer.
Answer: False. (Fairness considerations can be seen as rational if individuals derive
utility from enforcing fairness or upholding social norms, making their behavior
consistent with a broader utility framework.)