ECON111 MICROECONOMIC PRINCIPLES

Consultation Worksheet
Topic: Consumer Theory

RE-CAP & REMIND

What is the slope of a budget line known as? How is this calculated?

What is the slope of an indifference curve known as?

What is the relationship between these two when a consumer is maximising utility? Represent
this in a diagram.

The slope of the BL is known as the _________. It is calculated as __________

The slope of the IC is known as the marginal rate of substitution (_________).
When the consumer is maximising ___________, the two are equal. Thus, the utility maximising
condition is: MRS = Px/Py

2015 Prashan Karunaratne, Macquarie University

ECONOMICS EVERYDAY
Joe has $100 a week to purchase either green goods (G y-axis) or carbon goods (C x-axis). The
price of green goods is $5 while the price of carbon goods is $10.
a) Draw Joe's budget line. Assuming that Joe chooses his best affordable choice (a bundle
consisting of 10 green goods and 5 carbon goods), add his indifference curve to the same
diagram.
HINT: Draw a tangent point at the given bundle

b) Explain and show on your diagram the effect of a decrease in the price of carbon goods to
$5.
HINT: Re-draw the new budget line above

c) Using a separate diagram derive Joes demand curve for carbon goods.
HINT: Think about whether the original bundle is still affordable or not. If so, is it still the best?
Draw a new tangent point.

2015 Prashan Karunaratne, Macquarie University

APPLICATION & AWARENESS

The former Federal Government introduced a Carbon Tax. The government understood that a tax
on carbon would probably increase the prices of goods and services produced by firms that have
the carbon tax placed upon them.
Show, using a budget constraint and indifference curve diagram, how a tax on carbon could possibly
leave consumers worse off and consuming less carbon goods.
Use green goods (G y-axis) versus carbon goods (C x-axis) as in the previous question.
continued in the next question

LEARNING LIFE LESSONS

continued from the previous question
The carbon tax package included compensation for consumers (households). Indeed the economic
modelling presented by the government to support its position suggested that the average
household may be better off after the carbon tax is introduced, once the compensation is taken
into account.
Show, using a budget constraint and an indifference curve diagram, how the carbon tax together
with the compensation package would still discourage the consumption of carbon goods.

2015 Prashan Karunaratne, Macquarie University

In your own words, explain the movement from A to B HINT: this is due to the
introduction of the carbon tax.

In your own words, explain the movement from B to C HINT: this is due to the
compensation package.

2015 Prashan Karunaratne, Macquarie University

2015 Prashan Karunaratne, Macquarie University