Unit 3 Revision
Question 1
Alissa receives an income of R196 which she can spend on popcorn and lollipops. The
price of a bag of popcorn is R14 and the price of a lollipop is R4. Assume that Alissa spends
her full income on these two products.
a) Write down an equation for Alissa’s budget line if popcorn is shown on the x-axis. [2]
b) What does the slope of her budget line indicate? [1]
c) If the price of popcorn decreases to R7 a bag, explain why Alissa would then be able
to consume more of both goods. [2]
d) If Alissa’s optimal consumption point is 6 bags of popcorn and 28 lollipops, what is
her MRS at this optimal point? [1]
Question 2
Alicia consumes only sour worms and magazines. A change in Alicia's income will change
the shape of her indifference curves.
a) True
b) False
Question 3
The MRS indicates the change in the consumer’s utility when one good is substituted for
another.
a) True
b) False
Question 4
Vuyokazi consumes only chocolate and magazines. Which of the following will lead to a
change in the shape of her indifference curves?
a) A change in her preferences for either chocolates or magazines, or both.
b) A change in the price of either chocolates or magazines, or both.
c) A change in her income.
d) Both (b) and (c) are true.
Question 5
The diagram below shows the budget constraints before and after a change in prices and
income, as well as an indifference curve of a consumer of Good X and Good Y.
a) Calculate the value of the MRS at point A. [2]
b) On BL1, if the price of Good X is R4, what is:
I. the price of Good Y? [1]
II. the consumer's income? [1]
c) On BL2, what is the relative price of Good Y? [1]
Question 6
Alana chooses how many hours to spend studying for a test. If the final grade she can
achieve is given by a concave production function, this implies that the marginal product
of each hour she uses to study _____ as the number of hours of study _____.
a) increases, increase
b) increases, decrease
c) decreases, decrease
d) decreases, increase
Question 7
The figure below shows the feasible frontier and indifference curve of a high school
student who faces a tradeoff between free time and school marks obtained.
At point A the student is not in equilibrium because ___________. He could increase his
utility by ___________
a) MRT > MRS; increasing his free time
b) MRT > MRS; studying more
c) MRT < MRS; studying more
d) MRT < MRS; increasing his free time
Question 8
Carlyssa learns a new study technique that allows her to achieve a higher mark for every
given number of hours she spends studying. This is shown by the outward shift of her
feasible frontier in the figure below.
Based on this information, we can say with certainty that Carlyssa will derive more utility
from option C than she would from option D.
a) True
b) False
Question 9
A worker faces a consumption constraint
𝑐 = 10(24 − 𝑡)
where 𝑡 is hours of free time per day and 𝑐 is consumption. The worker is paid in Rands.
a) Assume that this worker can work for a maximum of 15 hours a day. What is the
worker's maximum possible daily consumption? [2]
b) Assume that an anonymous benefactor pays this worker R100 every day,
irrespective of the hours worked. What is the opportunity cost of one hour of free
time? [1]
The worker is now told that his wage is going to increase by R5 for every hour worked. He
will still receive the R100 from the benefactor.
c) Write an equation for his new consumption constraint. [1]
d) What is the substitution effect of this wage change on free time? Explain your
answer. No calculations are required. [2]
Question 10
During the end-of-year holidays, you find work selling ice creams for a shop next to the
beach. The company tells you that you will be paid per hour and that your hours are
flexible; that is, you can choose how much you want to work. The figure below illustrates
your budget constraint and several indifference curves.
What is the hourly wage rate that the company will pay you?
a) R34
b) R27
c) R15
d) R30
Question 11
Jim receives a wage of R20 per hour, and Dwight receives a wage of R15 per hour. To
maximise utility, Jim works 35 hours per week and Dwight works 42 hours per week. The
opportunity cost of an additional hour of free time is higher for Dwight than it is for Jim.
a) True
b) False
Question 12
The figure below indicates the feasible set of a student’s final grade and hours of free time
per day. Based on this information, we can say that the student’s choice between A or B
depends on their preferences.
a) True
b) False
Question 13
The graph below indicates the feasible frontier of James, who produces and consumes
nachos, as well as his indifference curves.
a) Which point on the graph above is James’s most preferred point? Explain your
answer. [2]
b) What is James’s opportunity cost of an hour of free time at point A? [1]
c) What is James’s optimal decision point? [1]
Question 14
A consumer who has a fixed income in Rands, consumes coffee and bread. Suppose that
coffee is a normal good, but bread is an inferior good. When the price of coffee increases,
ceteris paribus, the substitution effect on the consumption of bread is _______, while the
income effect on bread is _______.
a) positive, negative
b) negative, positive
c) negative, negative
d) positive, positive
Question 15
Suppose that the price of good Y decreases, while the price of good X and a person's
income remain the same. If the person's consumption of X remains unchanged after the
decrease in the price of Y, it means that:
a) the income and substitution effects are not applicable in this instance.
b) the income and substitution effects on the consumption of X are zero.
c) the increase in the consumption of X (caused by the income effect) is countered
exactly by the decrease in consumption of X (caused by the substitution effect).
d) the income and substitution effects work in the same direction.
Question 16
You are working as an intern during the summer holidays and currently optimise your
labour-leisure decision at point A (note: the graph is not drawn to scale). You only have
labour income with which to spend on consumption.
a) What is your current hourly wage rate? [1]
Your employer is impressed with the quality of your work and decides to increase your
hourly wage to R200. This takes you to a new optimal point B.
b) What are the income and substitution effects on your free time? Provide economic
reasoning for the directions of these effects. [4]
