Chapter 1: supply and demand

INTRODUCTION TO MICROECONOMICS :
EXERCISE SESSIONS
Edition 2024-2025 1

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Assistant: Francisco Varnet Pérez

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This exercise syllabus is made to follow the exercise sessions of Introduction to Microeconomics
(ECON S 1702). Don’t forget to have it up to date in the following way:

• Before every exercise session: complete the “To Review” session, with the help
of the theoretical part. The assistant can check this part to verify it is up to date.
• After every exercise session: solve the additional exercises.
• Regularly, to prepare yourself to the tests and the exam, try to solve the “To be
tested at home” part. The “True / False” questions will help you to test your
theoretical knowledge. The exercise questions, which are often old exam
questions, can help you test your ability in the subject.

1 The first edition was compiled and edited by Renaud Foucart, Julien Ravet, Micael
Castanheira, Salvador Bertomeu Sanchez, Alexis Walckiers, Alexis Mergan, Benjamin Rausch and
Arnaud Wala. This would not have been possible without the generations of assistants and
students that have participated in its making throughout the years.

1
Chapter 1: supply and demand

Table of subjects:

Chapter 1: supply and demand ............................................................................................................... 3

To Review… ......................................................................................................................................... 3
Exercises ............................................................................................................................................. 6
Additional exercises .......................................................................................................................... 10
To be tested at home… ..................................................................................................................... 13
Chapter 2: Elasticity .............................................................................................................................. 15
To Review… ....................................................................................................................................... 15
Exercises ........................................................................................................................................... 18
Additional exercises .......................................................................................................................... 21
To be tested at home ........................................................................................................................ 23
Chapter 3: Utility and consumer choice ............................................................................................... 25
To Review… ....................................................................................................................................... 25
Exercises ........................................................................................................................................... 28
Additional exercises .......................................................................................................................... 33
To be tested at home ........................................................................................................................ 36

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Chapter 1: supply and demand

Chapter 1: supply and demand

To Review…

ü Draw the short side rule in the following graph:

Complete with Qu- Ql- Qs- Qd:

…
Complete with bought – demanded -
supplied - sold:

Qu = quantities ………………………
Ql = quantities ………………………
Qo = quantities ………………………
Qd = quantities ………………………
…

ü Consider a market with n consumers where consumer i's demand i is qiD .

How do we compute the market demand (QD)? QD = ………………

ü Consider a market with m producers where the producer i'’s supply is q𝑞iO! .
"

How do we compute the market supply (QS)? QS = ………………

ü Complete

S3 Initial demand: D1
P S1
S2
The demand increases autonomously in D…
The demand decreases autonomously in D…

Initial supply: S1

Supply increases autonomously in S…

D2 Supply decreases autonomously in S…
D1
D3
Q

3
Chapter 1: supply and demand

1. Find examples of complementary and substitute goods

Complementary goods Substitute goods

1. and 1. and

2. and 2. and

3. and 3. and

4. and 4. and

5. and 5. and

ü What are the consequences of the following events on the demand of good X?

Events QD shift on the curve/ Graph

autonomous shift
increases/decreases

Price of X increases
Q

Income increases
Q

The price of a P

complementary good
to X increases Q

P
The price of substitute
to X increases
Q

P
Change of preferences of
consumers in favor of X
Q

4
Chapter 1: supply and demand

ü What are the consequences of the following events on the supply of good X?

Qs Shift on the curve/

Event Graph
increases/decreases autonomous shift

Price of X increases

P
Productions costs of
X increase
Q

Technological P

progress in the
production of X
Q

Expectation of P

profitability in the
market for X
Q

5
Chapter 1: supply and demand

Exercises

1. The table below represents the supply (s) and demand (d) of good X. Using this
table, answer the questions below:

Price in € Quantities
Column A Column B
20 15 6
22 14 8
24 13 10
26 12 12
28 11 14
30 10 16

a) Draw a graph representing the relationship between prices and quantities in columns
A and B, with price on the Y axis and quantities in the X axis.
b) Algebraically compute the supply and demand functions with price as dependent
variable and quantities as independent variable.
c) Is demand / supply an increasing function of price (P);
d) Is demand / supply a decreasing function of price (P);
e) The slope of the demand function can be explained by the principle of increasing /
decreasing / neither of those marginal utility;

2. Consider the market of good X and the following two curves:

(i) P = 2Q + 1
(ii) P = 10 - Q

I. Cross out the unnecessary mention in each of the following statements:

a) equation (i) represents a demand / supply curve ;

b) equation (ii) represents a demand / supply curve;

II. Compute algebraically and graphically:

c) The equilibrium price (𝑃! );

d) The equilibrium quantity (𝑄! ).

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Chapter 1: supply and demand

III. Let’s assume that the government sets the price of good X:

e) If the government sets P=2, compute, algebraically and graphically Qs, Qd,
Qu and Ql.
f) If the government sets P=8, compute, algebraically and graphically Qs, Qd,
Qu and Ql.
(Qs = supplied quantities—Qd = demanded quantities—Qu = quantities bought—Ql
= sold quantities)

IV. Let’s assume that the government sets de ceiling or floor prices of good
X:

g) If the government sets a floor price of P=2, compute, algebraically and

graphically Qo, Qd, Qu and Ql.
h) If the government sets a ceiling price of P=8, compute, algebraically and
graphically Qo, Qd, Qu and Ql.

3. Consider an agricultural market. The individually supplied quantities (by each

producer) and the individually demanded quantities (by each consumer) are:

𝑞" = 𝑃 − 1
𝑃
𝑞# = 1 −
2

All producers and consumers have the same individual supply or demand.

a) Determine the supply and demand equations for the market as a whole if
there are 2 producers and 3 consumers;
b) Determine the supply and demand equations for the market as a whole if there
are 10 producers and 20 consumers;
c) Graphically represent individual supply and demand, as well as supply and
demand for the market as a whole for case b above. Provide an interpretation.
d) Determine the equilibrium price, the produced and purchased quantities in the
equilibrium by individuals and for the market as a whole for case b above.

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Chapter 1: supply and demand

4. The price of car is 12.500 euros and, at this price, the quantities demanded are 1.000
units. At which point we would be if:

H B E
12500 D
G A

I C F D"
D
D'
1000 Q

a) the price of the car increases;

b) the price of gas increases;
c) the price of the train ticket decreases;
d) the price of gas decreases;
e) the income per inhabitant increases.

5. Consider the following supply and demand:

(i) P = 2Q + 1
(ii) P = 10 - Q

I. Determine if the following statements are correct:

a) if the price of good Y — substitute of good X — was to increase, then a line of

equation P = 11 – Q could represent the demand of good X after this increase of
good Y;
b) if the price of good Y — substitute of good X — was to increase, then a line of
equation P = 8 – Q could represent the demand of good X after this increase of
good Y;
c) if the price of good Z — complementary of good X — was to increase, then a
line of equation P = 8 – Q could represent the demand of good X after this
increase of good Z;
d) if the purchasing power of consumers was to increase, then a line of equation P
= 13 – Q could represent the demand of good X after this increase in purchasing
power;
e) if the purchasing power of consumers was to increase, then a line of equation
P = 2Q + 2 could represent the demand of good X after this increase in
purchasing power

8
Chapter 1: supply and demand

II. Let’s assume now an autonomous increase of the quantity demanded of

good X of 3 units. Everything else equal, complete the statements below:

f) following the aforementioned increase, the equilibrium price in the market of

good X changed from PE = to PE’ = ;
g) following the aforementioned increase, the equilibrium quantities changed
from QE = to QE’ = ;

6. Points X1 and X2 represent two consecutive points of equilibrium in the market for
good X. For each of the two graphs, the change from X1 to X2 is possibly due to:

P P
X1 X2

X2 X1

Q Q

a) an increase in the supply (without shifting of demand);

b) an increase in supply and demand;
c) an increase in demand (without shifting of supply);
d) a decrease in demand and an increase in supply;
e) a decrease in supply and an increase of demand.

9
Chapter 1: supply and demand

Additional exercises

1. Consider an agricultural market composed of 160 producers et de 100 consumers.

The individual quantities supplied (by each producer) are qs = 2,5P – 250. The
individual quantities demanded (by each consumer) are qd = -7,5P + 2250.

If every producer and every consumer have the same individual supply or individual
demand, hence:

a) Determine the equations for supply and demand for the market as a whole;
b) Compute the price and quantity of equilibrium for the market as a whole.

2. Determine the correct statement(s), by eliminating the cases where supply and/or
demand are horizontal or vertical:

a) if supply does not move, an autonomous increase of demand will generate an

increase in the price and quantity of equilibrium;
b) if demand does not move, an autonomous increase of supply will generate an
increase in the price and quantity of equilibrium;
c) if supply and demand decrease autonomously, the equilibrium quantity will
always decrease but the equilibrium price will, depending on the case, increase,
decrease or remain constant;
d) following an increase of supply and a decrease of demand (both autonomous),
the equilibrium quantity will always decrease but the equilibrium price will,
depending on the case, increase, decrease or remain constant;
e) none of the above is correct.

10
Chapter 1: supply and demand

3. Here there is some data relative to the demand and supply of delicious jelly for Her
Majesty’s Kingdom.

Demand and supply of jelly (by kilo) :

Price in £ Quantities demanded (#) Quantities supplied (#)
10 10 3
12 9 4
14 8 5
16 7 6
18 6 7
20 5 8

After defining the demand and supply curves, determine the correct statement(s):

a) the price and equilibrium quantity are 17 £ and 6.5 kilos respectively;
b) the price and equilibrium quantity are 13 £ and 13 kilos respectively;
c) if the price is set by the Government at 12 £ and it does not intervene as an actor
in the market, then the sold quantities will be equal to supplied quantities;
d) if the price is set by the Government at 20 £ and it does not intervene as an actor
in the market, then the sold quantities will be equal to supplied quantities;
e) none of the above statements is correct.

4. Which are, among the following elements, the ones that would be generating an
autonomous increase of the supply of grain products (corn, wheat, barley,..) ?

a) a decrease in the price of fertilizer;

b) the development of more resilient and, consequently, more productive
varieties;
c) a persistent drought for many consecutive years;
d) an increase in the price of cereal products (i.e., their selling price on agricultural
markets);
e) an anticipation of the return to consumption of products based on soy, rice,
rather than products based on grain;
f) larger subsidies granted by government authorities for the production of
oilseeds such as rapeseed.

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Chapter 1: supply and demand

5. Considet S and D the supply and demand of laser printers, respectively. Determine
the correct statements based on the graph below:

P
O
S
S’
O’
B

A C

D’
D

a) The shift from equilibrium A to equilibrium B may be due to the introduction

of a new technology that reduces the production costs for inkjet printers but not
laser printers;
b) The shift from equilibrium A to equilibrium B may be due to an increase in the
budget allocated by households to printer purchases;
c) The shift from equilibrium A to equilibrium B may be due to an increase in the
budget allocated to printer purchases;
d) The shift from equilibrium A to equilibrium C may be due to the
implementation of legislation that equally splits the cost of recycling a polluting
component of the inkjet printer between the producer and the consumer;
e) None of the above statements is correct.

12
Chapter 1: supply and demand

6. Consider the following supply and demand curves:

P = Q2
P = 15 - 2Q

Determine the correct statement(s):

a) At equilibrium, the price is 9;

b) At equilibrium, the price is 3;
c) Following an autonomous increase in demand, the equilibrium price and
quantities increase;
d) Following an autonomous increase in supply, the equilibrium price and
quantities decrease;
e) None of the above statements is correct.

To be tested at home…

1. TRUE or FALSE:

a) in a market economy, the different markets are independent;

b) demand always rises with the price;
c) regarding the demand, the relationship between price and quantity is
decreasing because marginal utility is decreasing;
d) the willingness to pay allows for assessing the altruism of economic agents;
e) the marginal utility tends to increase when the quantity consumed does the
same;
f) if the quantities bought are equal to the quantities sold, then there is always an
equilibrium in the market;
g) if the quantities demanded are equal to supplied quantities, then there is always
an equilibrium in the market;
h) if the market price is set above the equilibrium price, then the quantities sold
are equal to the quantities supplied;
i) if the market price is set above the equilibrium price, then the quantities
demanded are less than the quantities supplied;
j) when prices are rigid (fixed), excess demand leads to the formation of unsold
inventory;
k) when prices are frigid (fixed), excess supply leads to the rationing of demand;
l) outside of the equilibrium situation, sales intentions are determined by the
short side rule;
m) the herd effect occurs when prices are set at excessively low levels;
n) adverse selection is the result of asymmetry of information that can exist among
participants of a transaction;
o) market equilibrium describes a situation where there is no force (reason)
driving changes in price and quantities.

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Chapter 1: supply and demand

2. Determine the correct statements excluding cases where supply and/or demand
are perfectly elastic or inelastic:

a) Following an autonomous increase in both supply and demand, the

equilibrium price increases, but the effect on quantities is indeterminate;
b) Following an autonomous increase in both supply and demand, the
equilibrium quantities increase, but the effect on the price is indeterminate;
c) Following an autonomous decrease in demand and an autonomous increase of
supply, the equilibrium price decreases but the effect on quantities is
indeterminate;
d) Following an autonomous decrease in demand and an autonomous increase of
supply, the equilibrium price increases but the effect on quantities is
indeterminate;
e) None of the above statements is correct.

14
Chapter 2: elasticity

Chapter 2: Elasticity

To Review…

1. Complete :

- Elasticity of a variable A with respect to a variable B =

growth rate of
tx de croissance de ... D ... / ... d ... ...
= =
txgrowth
de croissance
rate of de ... D ... / ... d ... ...

APPLICATIONS :
growth rate of
tx de croissance de ... D ... / ... d ... ...
- Price-elasticity of demand = ηd = - =- =-
txgrowth
de croissance
rate of de ... D ... / ... d ... ...

Meaning : if P increases (decreases) of x%, Qd ……..…….. (……………..) of …….. %

txgrowth rate of
de croissance de ... D ... / ... d ... ...
- Price-elasticity of supply = ηs = = =
txgrowth
de croissance
rate of de ... D ... / ... d ... ...

Meaning : if P increases (decreases) of x%, Qs ………….. (…..………..) of ……….. %

2. Circle the correct statements:

Elastic supply or demand ó superior / inferior / equal elasticity to 1

Inelastic supply or demand ó superior / inferior / equal elasticity to 1

• If demand is elastic, an increase in P generates an increase / decrease of QD more

/ less than proportional.
• If supply is inelastic, an increase in P generates
an increase / decrease of QO more / less than proportional.

3. Connect the dots (from A to B and from B to C)

A B C

Offre parfaitement élastique

Perfectly elastic supply Infinite elasticity
Elasticité infinie
Offre parfaitement inélastique
Perfectly inelastic supply
Demande parfaitement élastique Elasticité nulle
Zero elasticity
Perfectly elastic demand
Demande parfaitement inélastique
Perfectly inelastic demand

15
Chapter 2: elasticity

4. Connect the dots (from A to B and from B to C)

A B
If PP increases
C
Si augmentea un
little,
peu,Q decreases
Q diminueby much
beaucoup

Demande élastique
Elastic demand LaTotal
recette
revenuetotale
If PP increases
Si augmentebybeaucoup,
a lot, Q decreases a little
Q diminue un peu
(P.Q) augmente
(P.Q) increases

Inelastic demand Si
If PP decreases
diminue beaucoup,
by a lot, QQincreases
augmente un peu
a little
LaTotal
recette
Demande inélastique revenuetotale
Si
(P.Q) diminue
(P.Q) decreases
If PP decreases
diminue un peu, Q
a little, Q augmente beaucoup
increases by much

5. Use the words of the following list to complete the text

elastic – inelastic – positive – negative -increase – decrease – more – less -
unitary – zero.

TRRT

RTTR

P Q
1 2 3
RM

MR
RM D
R Q

In area 1, demand is and

marginal revenue is . If prices decrease, then the quantities demanded
will than proportionally
and total revenue will then .
In area 3, demand is and
marginal revenue is . If prices decrease, then quantities demanded will
than proportionally
and total revenue will then .
At point 2, demand has an elasticity .
while marginal revenue is and
total revenue is maximized.

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Chapter 2: elasticity

6. Complete

Consider the following demand: D º P = a - bQ

Total revenue = TR = PQ = ……………………..

Marginal revenue = MR = dTR/dQ = ……………………..

Elasticity of demand is 1 while Q = ……………………..

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Chapter 2: elasticity

Exercises

THE CONCEPT OF ELASTICITY

1. A furniture manufacturer sells on average, each year, 1,200 sofas. Given that price
elasticity of demand for this type of product is 1.25:
a) how many sofas can this manufacturer expect to sell if he raises his prices by
3%?
b) determine the price adjustment that the manufacturer will need to make if he
wants to increase his annual sales to 1,320 sofas,

2. If supply of good X is perfectly inelastic and the price of substitute good to X

decreases, then, for good X we get (all other things equal and demand being not
perfectly elastic nor perfectly inelastic):
a) the equilibrium quantity increases and price;
b) the equilibrium quantity remains constant and price decreases;
c) the equilibrium quantity decreases and price remains constant;
d) the equilibrium quantity increases and price remains constant;
e) none of the above proposition is correct.

TOTAL REVENUE AND MARGINAL REVENUE

3. A former student in Economics Sciences reveals to you that the demand curve for his
product can be expressed by equation P = 10 - 2Q. The former student thought that the
price charged was 2.
a) Based on the information above, compute the elasticity of demand at the
charged price;

I. After a long conversation, the former student seems to be mistaken. The

price elasticity of demand was 2 at the price that was charged, but he no
longer remembers the price charged or the quantities sold at that price.

b) Based on the information above, find the values of P and Q;

II. If the price increases, which of the following statements is correct:

c) total revenue increases;

d) total revenue decreases;
e) Price elasticity of the demand increases.
f) Price elasticity of the demand decreases;

III. Did the former student maximized his total revenue for the pair (P;Q)? If
not, what should the price and quantities be for the total revenue to be
effectively maximized?

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Chapter 2: elasticity

4. Consider the two following curves:

P = 20 - 5Q
P = 5Q
Determine which statement is correct:
a) In equilibrium, supply elasticity is unitary;
b) In equilibrium, marginal revenue is zero (2 methods to verify) ;
c) For all price higher than equilibrium, marginal revenue is strictly positive;
d) For all price lower than equilibrium, marginal revenue is strictly positive;

TAXES AND SUBSIDIES

5. Consider the market for good X. The demand and supply are expressed as the
following equations:
P = 10 – Q
P = 2Q + 1

The government decides to set a unitary sales tax of 3 euros.

a) Determine the price and quantities exchanged in equilibrium before the
introduction of the tax;
b) determine, after the introduction of the tax:
- the new demand curve to be expressed as: D º PV = a – b Q
- PA (the equilibrium price, including tax, paid by the buyer),
- PV (the net price, excluding tax, received by the seller), and
- exchanged quantities in equilibrium;
- the revenue generated by the tax.
c) determine the economic burden generated by the introduction of the tax:
- for the buyer,
- for the seller.
d) what would be the economic burden of the buyer if supply was perfectly
inelastic?
e) Determine the PA, the PV, as well as the distribution of the burden if the unit tax
of 3 euros is payable by the seller, all other things equal. What do you observe?

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Chapter 2: elasticity

6. Consider the market for good X represented by the graph below:

Starting from equilibrium price, the government introduces a unit tax T on the supply
of this good. Following the introduction of this tax, determine:

a) The change in consumer surplus;

b) The change in producer surplus;
c) The change in tax revenue;
d) The change in overall welfare for the economy as a whole.

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Chapter 2: elasticity

Additional exercises

1. A fast food establishment sells pizza slices. Using the information from the table
below, answer the following questions (without rounding your intermediate
computations):

Demand supply of pizza slices

Prix en euros Quantités demandées Quantités offertes

Price in euros Quantities demanded (# of slices) Quantities supplied (# of slices)
(# de parts) (# de parts)
2 200 0
4 150 100
6 100 200
8 50 300
10 0 400

After defining the demand and supply curves:

a) Determine the equilibrium price as well as the number of pizza slices

exchanged at equilibrium;
b) Determine the price elasticities of demand and supply at the equilibrium point
and characterize them;
c) Determine the price elasticity of supply at point (P;Q) = (6;200) and characterize
it ;
d) Determine the pair (P;Q) such that the price elasticity of demand is unitary at
this point.

Furthermore, determine the correct statements:

e) if price is set by the government at 3 euros and it does not intervene in the
market as an actor in this market, then the amount of quantities sold will be the
same as quantities supplied;
f) If price is set by the government at 7 euros and it does not intervene in the
market as an actor in this market, then the amount of quantities sold will be the
same as quantities supplied.

Finally, if we assume that for each price level, supplied quantities increase in 100 slices:

g) At the new equilibrium, the price will decrease by nearly 30% and the quantity
will increase by 25% ;
h) At the new equilibrium, the price will decrease by nearly 25% and the quantity
will decrease by 30% ;
i) The price elasticity of the new supply curve will consistently be unitary.

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Chapter 2: elasticity

2. A Swedish economist who decomposed an indicator measuring inequality in 1925

was able to show that the elasticity of the inequality indicator with respect to
men’s wages is –0,0060, and that elasticity of the inequality indicator with respect
to women’s wages is –0,1032, and that the elasticity of the inequality indicator with
respect to capital income is 0,1132. Indicate the correct statement(s) regarding the
inequality indicator in 1925:

a) If men’s wages increase by 25%, the inequality indicator is reduced by 0.15%;

b) If women’s wages increase by 10%, the inequality indicator is reduced by
1.032%;
c) If capital income increases by 10%, the inequality indicator is reduced by
1.132%;
d) Increasing men’s wages by 17,2% has the same effect on the inequality indicator
as increasing women’s wages by 1%;
e) None of the above statements is correct.

3. Consider the demand of a good be expressed by the equation P = 20 - 1/100 Q and

supply of this good be expressed by the equation Q = 1100.

• determine the price and quantity at equilibrium;

• determine the price elasticities of supply and demand at this point;

If the produced quantity reaches Q = 1150, determine the correct statement(s):

a) the price increases;

b) the price increases and the total producer revenue increases;
c) the price decreases and total producer revenue increases;
d) the price decreases and total producer revenue decreases;
e) None of the above statements above are correct.

4. If, as a seller of a product in a market, you believe that price elasticity of demand
for your product is 3/2 and your sell price is 90 euros:

a) determine the value of the marginal revenue;

b) if your goal is to increase your revenue, should you increase, decrease, or not
change the price of your product?

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Chapter 2: elasticity

5. According to 1992 data from the OECD regarding Belgium, if the salary of a woman
who has completed her secondary education (12 years of schooling) is 100, i twill
be 78 if she does not have her secondary diploma (9 years of schooling) and 164 if
she has completed university studies (an additional 4 years of schooling).

Determine the correct statement(s):

a) The wage elasticity with respect to university studies (computed at the end of
higher secondary studies) is 1.92 ;
b) The wage elasticity with respect to university studies (computed at the end of
higher secondary studies) is 0.52 ;
c) The wage elasticity with respect to university studies (computed at the of lower
secondary studies) is 1.18 ;
d) The wage elasticity with respect to university studies (computed at the of lower
secondary studies) is 0.85 ;
e) It is impossible to compute the proposed elasticities above;
f) None of the above statements are correct.

6. (Question June 2021): The market for asparagus is characterized by the following
supply and demand curves (P in €; Q in number of packets) :

(i) P = 28 -2Q
(ii) P = 10 + Q

To incentive the consumption of healthy food, the government decides to introduce a

subsidy of 3€ to producers for each packet sold.

Tip: A subsidy is a negative tax.

Following the introduction of this subsidy, determine the correct statement(s):

a) The consumer surplus will be 47 after the introduction of the subsidy;

b) The consumer surplus increases 13 following the introduction of the subsidy;
c) The price paid by the buyer is less than 15 after the introduction of the subsidy;
d) The price received by the seller is more than 18 after the introduction of the subsidy.

To be tested at home

1. TRUE or FALSE:

a) Price elasticity of demand indicates, in absolute terms, the percentage change

in the quantity demanded of a good divided by the percentage change in the
price of that good;
b) A price elasticity of demand of ½ means that if the price of a good decreases by
1%, the demand of this good will increase by 2% ;

23
Chapter 2: elasticity

c) After the price elasticity of demand takes a value between 0 and 1, we say that
the demand is relatively inelastic. This means that it is relatively insensitive to
price changes;
d) Price elasticity of demand for food items is generally higher than the price
elasticity of demand for luxury goods;
e) Price elasticity of demand for detergents is generally higher than the price
elasticity of demand for the product Ariel;
f) The demand for goof X is inelastic if the increase of the price of this good X
decreases the total revenue for the producer;
g) Demand is inelastic if a weak increase generates a strong decrease in demanded
quantities;
h) A unitary price elasticity of demand indicates that total revenue will remain
constant after an increase in quantities following a small decrease in price;
i) When the price elasticity of demand is equal to 1, slight changes in price cause
significant variations in total revenue;
j) The demand of a good is elastic if the price decrease of this good generates an
increase in total revenue;
k) The demand of a good is elastic if a small price increase generates a strong
decrease of the demanded quantities;
l) The demand of a good is inelastic if an increase in price of this good generates
a decrease less than proportional of demanded quantities for this good;
m) It is possible to have a demand curve such that price elasticity of demand is
identical in all points of this curve;
n) The price elasticity of supply in the very short run is greater than the price
elasticity of supply in the short or long run;
o) The supply of a good is generally inelastic in the long term;
p) A unit price elasticity of supply indicates that the product PxQ will remain
constant when quantities supplied increase in response to a price increase;
q) When demand is perfectly inelastic, the economic burden of the tax is entirely
borne by the buyer;
r) If the demand of a good is perfectly inelastic and the government introduces a
20% tax on the price of this good, the demanded quantity will decrease;
s) Regardless of who bornes physically the tax, the economic burden of such will
always be equitably borned by the buyer and the seller.

2. Determine the correct statement(s):

a) The broader and more aggregated the category of good considered, the less
elastic demand is;
b) The smaller the share of income devoted to the good, the less elastic the demand
for that good is;
c) The elasticity of supply is lower in the short term than in the long term ;
d) The elasticity of supply is higher in the short term than in the long term;
e) None of the above statements is correct.

24
Chapter 3: Utility and consumer choice

Chapter 3: Utility and consumer choice

To Review…

1. Complete

A basket (A,B) provides the consumer with a U(A,B) (where A is the quantity of goods
A and B the quantity of goods B).
According to this consumer’s
B preferences (complete with >, < or =) :

U(Basket 4) ….. U(Bas.3) ….. U(Bas. 2)

et U(Bas. 2) ….. U(Bas. 1)
4
1 ó U3 ….. U2 ….. U1
3 U3
U2 The consumer is …………………… between baskets
2 U1 that are on the same indifference curve.

Circle the correct statements

B
peu / beaucoup
little / much of de
A A
peu
little / much of B B
/ beaucoup de
UMA élevée / faible , UMB élevée / faible
high / low 𝑀𝑈$ , high / low 𝑀𝑈%
TMSB,A élevé / faible
high / low 𝑀𝑅𝑆%,$
1 peu / beaucoup
little / much of de
A A
peu / beaucoup de B
little / much of B
UMA élevée / faible , UMB élevée / faible
IC high / low 𝑀𝑈$ , high / low 𝑀𝑈%
1 TMSB,A élevé / faible
high / low 𝑀𝑅𝑆%,$
A

2. Complete

UM ...
!"… d ...
𝑀𝑅𝑆
TMS B, A =
%,$ ==- $ &…
UM ...
!"… d&…
...
d ... $ !"…
UM ...
Slope of the indifference curve = = -TMS
−𝑀𝑅𝑆 …=
...,... -=
, ….
d ... UM!"…
...

25
Chapter 3: Utility and consumer choice

3. Complete

B
Budget constraint:
…… Slope = …….
PA A + PB B = Y
(budget) ó

B = ……………………..

A
……

4. Complete
The consumer basket that corresponds to
B the consumer’s optimum is the ……….
Basket.
2 This optimum corresponds to the following
maximization:
3 Max ………………………….
under constraint
4 U3 ………………………………
U2 The first-order condition to this
1 maximization is
U1
UM ... P... P...
!"… =!… Û TMS ... , ... = !…
A UM =
... !…
!"…
⇔
P... 𝑀𝑅𝑆 … , … = P...
!…

26
Chapter 3: Utility and consumer choice

5. Connect the dots (A to C, B to C and C to D)

Utility of type U(A,B) = min{αA,βB} We only consume from A to the optimum

A B
Utility of type U(A,B) = αA+βB We only consume from B to the optimum

B B B

A A A
Budget constraint

D Perfect complementary goods Perfect substitute goods

6. Connect the dots

B B B

PA increases
PA decreases A A A
PB increases
PB decreases
Income increases
Income decreases
B B B

A A A

27
Chapter 3: Utility and consumer choice

Exercises
UNDERSTANDING GRAPHS

1. A rational consumer decides to switch from consumer basket E to basket F. What

could be the potential reasons for this choice?

X
a) A change in her preferences;
b) A decrease in PY ;
c) An increase in PX ;
d) A decrease in income Yo;
e) A decrease in PY and PX ;
f) An increase in PY and PX.

2. Assuming that points 1 and 2 are two consecutive optima, when switching from
1 to 2:

a) The consumer increases her level of satisfaction;

b) The consumer’s budget increases;
c) The consumer substitutes A with B;
d) The consumer redistributes her consumer basket after a decrease PA with
respect to PB ;
e) None of the above is correct.

28
Chapter 3: Utility and consumer choice

3. Let’s assume that the optimum is initially in point 1. Determine the correct
statement(s)

a) If the new optimum is at point 2, this can be explained by a decrease in PB and

an increase in PA;
b) If the new optimum is at point 2, the consumer increases her level of
satisfaction;
c) By moving from point 1 to point 2, the consumer increases her MRSB,A ;
d) If the new optimum is located at point 3, the consumer decreases her level of
satisfaction;
e) Moving from point 1 to point 3, the consumer increases her MRSB,A ;

29
Chapter 3: Utility and consumer choice

UNDERSTANDING THE MATH

4. A consumer has a budget of 1000 which he spends entirely on the purchase of

two goods, A and B.
a) Identify and draw the budget line on a graph, knowing that pA=10 and pB=20.
b) Knowing that the consumer is rational and that her preferences satisfy the non-
satiation condition, can you identify her consumption of A and of B?
c) Compute and draw the new budget line if pB=10
d) Compute and draw the new budget line if pA=20

5. The preferences of a rational consumer are given by the following function:

U=(A.B)0.5
Determine:
a) The equation of the indifference curve for U=1
b) The MRSB,A for any consumer basket;
c) If this consumer has a budget of 1.000 euros which she spends in two goods
whose prices are PA = 10 euros and PB = 5 euros, which are the consumed
quantities for each good at the optimum;
d) How do these quantities evolve if prices remain the same, but preferences
become: U=(A.B)
e) How do these quantities evolve if prices remain the same but preferences
become: U=(A.(B - 4))

6. A consumer has a budget of 100 euros which she spends on two goods, X and Y.
Their respective prices are given by PX and PY. The utility function is expressed
as follows:
U=XαYβ

a) Determine the respective shares of income devoted to the consumption of good

X and good Y;
b) Determine the demand curve for this individual if α=0.25 and β=0.75.

30
Chapter 3: Utility and consumer choice

ELASTICITY AND OTHER CROSS EFFECTS

7. Consider the following two graphs:

Answer True of False for each graph:

a) the cross-price elasticity [(ΔB/B) / (ΔPA/PA)] is zero;

b) the price elasticity for good A -[(ΔA/A) / (ΔPA/PA)] is zero;
c) the price elasticity for good A -[(ΔA/A) / (ΔPA/PA)] is constant and unitary at
all points.

8. The following graph illustrates the preferences of a consumer who consumes

goods A and B.

3y

2y

Determine the correct statements:

a) The income elasticity of good B is zero;

b) The income elasticity of good A is zero;
c) The income elasticity of good B is infinite;
d) Starting from the optimum on the lower budget curve, if the price of both goods
triples, the consumer will reach the optimum on the upper budget curve;

31
Chapter 3: Utility and consumer choice

9. Consider two brands of USB flash drives: A and B. Mr. X finds the two brands
perfect equivalent. Mrs. Y finds brand B twice as good as A. Their relative
preferences do not change with the quantities consumed of the two goods. Each
individual has a budget of 80€.

a) Draw one of Mr. X’s indifference curves;

b) Draw one of Mrs. Y’ indifference curves;
c) If the price of brand A is 8 € for 1 USB flash drive, while the price of brand B is
10 € for 1 USB flash drive, what will be the optimum for each consumer? Show
graphically.
d) If brand A’s price drops to 5€, how is each consumer’s optimum affected? Show
graphically.
e) Give an example of a utility function that could correspond the respective
preferences of Mr. X and Mrs. Y.

10. Consider a rational consumer who spends all her income on two goods, A
and B. Her preferences for the two goods are given by the following utility
function:

U(A, B)= min {3A, 6B}

Given that the consumer has an income of 100€, and that the prices of the
two goods are respectively 𝑷𝑨 = 10 and 𝑷𝑩 = 5, determine the correct
statement(s):

a) At the optimum, the quantity consumed of A is 10 and the quantity consumed

of B is 5;
b) At optimum, the MRS is equal to the price ratio;
c) If the price of good B were to double, the quantity consumed of A would
decrease by 10;
d) A and B are ordinary goods.
e) None of the above statements is correct.

32
Chapter 3: Utility and consumer choice

Additional exercises

1. Following an advertising campaign, a brand of table drink succeeds in increasing

its sales to consumers. Will the new equilibrium be represented by:

a) A shift in its indifference curves;

b) A shift in the consumer’s optimum on a given indifference curve;
c) A shift in the budget line.
d) None of the above is correct.

Show the effect of this campaign on the following graph:

Other product
Autre produit

Boisson avecdrink
Advertised pub

2. Fabienne has a basket of apples (A) and oranges (O) such that her marginal rate of
substitution -(dP/dO) is 2 (with O on the x-axis and A on the y-axis).

Determine the correct statements:

a) Fabienne is ready to give up 2 apples in exchange for 1 orange while retaining

the same level of utility;
b) If the price ratio (PO/PP) is 1, Fabienne, in order to reach her optimum, will have
to increase her consumption of oranges and reduce her consumption of apples;
c) If the price ratio (PO/PP) is 2, Fabienne, in order to reach her optimum, will have
to increase her consumption of oranges and reduce her consumption of apples;
d) If the price ratio (PO/PP) is 3, Fabienne, in order to reach her optimum, will have
to increase her consumption of oranges and reduce her consumption of apples;
e) None of the above statements is correct.

33
Chapter 3: Utility and consumer choice

3. If a consumer consumes a lot of good A and very little of good B, it can be stated
that (with A on the x-axis and B on the y-axis):

a) The increase in her utility, if she were to consume one more unit of good A, is
very small;
b) The increase in her utility, if she were to consume one more unit of good B, is
very small;
c) For a given indifference curve, the MRSB,A is very low;
d) For a given indifference curve, the -(dB/dA) will increase if she were to reduce
her consumption of good A;
e) None of the above is correct.

4. Consider the following graph, representing Samira’s indifference curve and budget
line for videogames and films:

Videogames

If the initial optimum is basket A, determine the correct statement(s):

a) Basket B could become an optimum if the price of films fells;

b) Basket D could offer more utility than basket A, if Samira had the budget to buy
basket D;
c) If the price of videogames increases and the price of films decreases, point C
could become an optimum;
d) Point B could be financially accessible (respects the budget constraint), if the
price of videogames decreases;
e) None of the above is correct.

34
Chapter 3: Utility and consumer choice

5. If a household devotes its entire budget to the consumption of two perfect

substitute goods (A and B), then:

a) MRSB,A is constant at all points of a given indifference curve;

b) MRSB,A decreases when the quantity consumed of good A increases;
c) assume that the price ratio (PA/PB) is equal to the marginal utility ratio
(MUA/MUB). In this case, to reach the optimum, the consumer can choose any
pair (A;B) on her budget constraint;
d) assume that the price ratio (PA/PB) is different from the marginal utility ratio
(MUA/MUB). In this case, the consumer will consume only one of the two
goods;
e) none of the above is correct.

6. Consider the following graph, representing the preferences of a person X:

Apples

Remember:

)!*+!,-./! +1.,/! 2, 34.,-2-5 +6,"47!# 68 9*6#4+- :

Income elasticity of good X = )!*+!,-./! +1.,/! 2, 2,+67!

Cross-price elasticity of good X with respect to 𝑃;

)!*+!,-./! +1.,/! 2, 34.,-2-5 +6,"47!# 68 9*6#4+- :
= )!*+!,-./! +1.,/! 2, 9*2+! 68 9*6#4+- <

Determine the correct statement(s):

a) The income elasticity for CDs is strictly positive;

b) The income elasticity for apples is strictly positive;
c) The cross-price elasticity of the price of apples and quantities of CDs is strictly
positive;
d) Apples are substitutes to CDs;
e) None of the above statements is correct.

35
Chapter 3: Utility and consumer choice

To be tested at home

1. TRUE or FALSE:

a) Utility is a cardinal concept;

b) The consumer is indifferent to the various consumption baskets located on the
same indifference curves;
c) The demand function for a good generally has a negative slope, whereas an
indifference curve generally has a positive slope;
d) Indifference curves are convex and do not intersect;
e) The concavity of indifference curves indicates that the marginal rate of
substitution decreases as the quantities consume of one or both goods increase;
f) “Normal” goods have positive income elasticity;
g) The marginal rate of substitution of good A for good B decreases when the
quantity consumed of good A increases;
h) When the price of a “normal” good increases, the combined effects of
substitution and income lead people to consume less of this good;
i) A Giffen good necessarily has a negative income elasticity; it is therefore
necessarily an inferior good;
j) The substitution effect linked to an increase in the price of a good has the effect
of reducing the quantity demanded of that good;
k) The slope of the budget line depends solely on the relative prices of the two
goods under consideration;
l) A consumer maximizes her utility at the point where her budget line intersects
an indifference curve;
m) The budget line determined the maximum quantity of one good that can be
consumed, given the level of consumption of the other good;
n) The consumer’s optimal choice is achieved when the marginal rate of
substitution between two good sis equal with to the ratio of the prices of these
same goods;
o) A good has a negative income elasticity only if, when income increases, the
consumer starts to prefer another good.

36
Chapter 3: Utility and consumer choice

Consider a consumer characterized by the following utility function:

U ( A, B) = 3 A + B

120 a b c

d e f
80

g h i
40

40 80 120 A
Different consumer baskets are represented in the above graph.

Determine the correct statement(s):

a) A and B are perfect complementary goods for this consumer;

b) The MRSB,A (-dB/dA) is constant and equal to 3 ;
c) The consumer prefers to consume basket b rather than basket i;
d) Baskets a and h are on the same indifference curve;
e) None of the above statements is correct.

2. The utility that Jacques Havelaar derives from his consumption of coffee (C) and
sugar (S) is given by the following expression:

U(C,S) = C0.8 S0.2

Where C is the number of coffees and S is the number of sugars he consumes each day. Knowing that
each cup of coffee is sold for 80 cents, determine the correct statement(s):

a) At the optimum, Jacques Havelaar never uses sugar in his coffee;

b) At the optimum, Jacques Havelaar takes, on average, two sugars with each
coffee;

If Jacques Havelaar decides to spend just 5€ a day on sugar and coffee, at the optimum:

c) Jacques Havelaar will consume 5 coffees per day;

d) Jacques Havelaar will consume 10 sugars per day;
e) None of the four statements above is correct.

37
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