Question

1- Answer the following questions about consumer preferences:

a. If Nada prefers Diet Coke to Diet Pepsi and Diet Pepsi to regular Pepsi but is indifferent between Diet Coke and

Classic Coke, what are her preferences between Classic Coke and regular Pepsi?

b. If Hadi purchases a Ford Mustang rather than a Ferrari, what are his preferences between the two cars?

c. If Ayya purchases a Ferrari rather than a Ford Mustang, what are her preferences between the two cars?

d. Samer and Saba are having a soft drink together. Coke and Pepsi are the same price. If Samer orders a Pepsi and Saba

orders a Coke, what are the preferences of each between the two colas?

2- Explain why any additional unit of a good eventually gives less and less extra utility than the previous additional unit.

Answer 1

Q1)

(a) Nada prefers Diet Coke to Diet Pepsi and Diet Pepsi to regular Pepsi

indifferent between Diet coke and classic coke

Thus, by transitivity, Nada prefers Classic coke to regular pepsi

(b) Since Ford Mustang is purchased instead of Ferrari, he prefers Ford Mustang to Ferrari

(c) Since Ferrari is purchased instead of Ford Mustang, he prefers Ferrari to Ford Mustang

(d) Same prefer Pepsi to coke and saba orders coke to pepsi.

Q2) This is called the law of diminishing marginal returns. Each additional unit of consumption gives less and less of additional utility and it may even become negative. For instance consider you are extremely hungry and start eating a pizza. The first slice will give you lots of utiltiy. But with each additional slice you feel less and less hungry and thus less utiltiy. there will be a point where you would not want to eat more even if it is offered for free (the point fo negative marginal utility)