The University of Queensland
Brisbane QLD 4072 Australia
T +61 7 334 670 64
F +61 7 3365 7299
E k.kalayci@uq.edu.au
W http://kenankalayci.com/
ABN: 63 942 912 684
CRICOS Provider 00025B
ECON3430:
MANAGERIAL ECONOMICS
TUTORIAL 3: Practise Problems
Questions
1) Larry and Teri allocate their consumption between two goods: hats and bats. The price of hats is
$4 each, and the price of bats is $8 each. For Larry, the marginal utility of the last hat consumed
was 8, and the marginal utility of the last bat was 24. For Teri, the marginal utility of the last hat
was 6, and the marginal utility of the last bat was 12. Which consumer is not maximizing his/her
utility? How can you tell? How should he/she change their allocation?
2) Suppose you want to sell your old bike for 400, which will strike customers like a lot for such a
bike. How does research on anchoring and adjustment suggest you do it?
3) Many cafés offer discounts to consumers who bring their own reusable cups (at least they used
to before covid-19). Instead, café owners could lower their default prices and have a surcharge
for those who want to use a disposable cup.
Explain why cafés might prefer using a discount rather than a surcharge.
4) Assume that Ailin and Bob have the following value function over exam scores:
v(x) = 2x for losses (x < 0)
and
v(x) = x/2 for gains (x ≥ 0)
Both use the expected exam score as their reference point.
a) Ailin expects to score 75 out of 100 on her upcoming midterm exam. She does better than
expected. What is her gain, in terms of value, if her final score is 93?
b) Bob also expects to score 75 out of 100 on his upcoming midterm exam. He does worse than
expected. What is his loss, in terms of value, if his final score is 67?
c) Insofar as you use your expectation as a reference point, what does having such value
functions say about maximizing value in your life? Should you set high expectations? Should
you perform well or poorly in exams?
d) Now, suppose Bob uses Ailin’s exam score as a reference point. What would be the value of
Bob’s loss if Ailin scores 93 and Bob Scores 67? And what would be the value of Bob’s gain
2
if Bob scores 93 and Ailin Scores 67?
e) Insofar as you use other people’s exam scores as a reference point, what does having such
value functions say about maximizing value in your life?
f) What is your value function for the final mark in this course?
5) Yesterday, you had a decent day: you first received a $48 tax refund, and then an old friend
repaid a $27 loan you had forgotten about. Suppose that your value function v(.) is defined by:
() = √/3 for gains and () = −3√|| .
a) If you integrate the two gains, what is the total value?
b) If you segregate the two gains, what is the total value?
Today you are having a bad day: you got a $144 speeding ticket while driving to the university and
you lost $25 on a bet with a friend.
c) What is the total value of your losses, if you integrate the two losses?
d) If you segregate the losses, what is the total value?
e) For these value functions what kind of attitude would give you the highest value?
6) Discussion questions
a) The existence of this junk removal service conflicts with which assumption about consumer
preferences?
b) Suppose you want to buy a new laptop. In making your decision would you use optimization
(with constraints) or a heuristic such as satisficing or elimination by aspects?