MICROECONOMICS – PROBLEM SET 1
CONSUMER THEORY
Reference material for the topics covered in this exercise class:
- Bernheim e Winston, Microeconomics, Chapters 1-4,
- Microeconomics - Exercises, Chapter 1.
The problem sets has three parts:
• First part: Multiple-choice questions;
• Second part: True/False;
• Third part: Exercises.
Part 1 – Multiple-choice questions
Please determine which of the following options is correct.
1) Consider the following generic demand curve,
Q
If the price of good Q increases:
a) The demand curve does not move
b) The demand curve shifts to the right
c) The demand curve shifts to the left
d) The demand curve becomes steeper
2) Economic forecasts indicate that in winter 2023, the quantity of electric cars traded
will increase, and their price will decrease. This necessarily implies that:
a) Supply will increase
b) Demand will increase
c) Demand will decrease
d) Supply will decrease
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3) The marginal rate of substitution (MRS) represents:
a) The maximum number of units of good Y one is willing to give up in ex-
change for an additional unit of X
b) The minimum number of units of good Y needed to be compensated for giv-
ing up one unit of good X
c) The absolute value of the slope of the indifference curve at a specific point
d) All of the above
Part 2 – True or False
Determine whether the following statements are true or false. Provide an explanation and
fully justify the answer [Note: The explanation and justification are more important than
the correct classification].
1) Serena likes both travels (good Y) and consumption (good X). At the currently con-
sumed basket (for which Serena spends all her income), the marginal rate of substitution
of the consumption good with a trip is 3, meaning Serena is willing to exchange 3 trips for
one unit of the consumption good. The price of one unit of consumption is 200 euros
(pX=200), and the price of a trip is 100 euros (pY=100). Therefore, Serena could increase
her utility by consuming less and traveling more.
2) Laura is indifferent between basket (40, 10) and basket (10, 40). This implies that the
basket (30, 30) is preferred to both.
3) Alessio is consuming his optimal basket of potatoes (good X) and meat (good Y). This
basket contains a positive quantity of both goods. The marginal rate of substitution at the
optimal basket is 3. If the price of meat is €1.5, then potatoes must be sold at a price of
€4.5.
4) Daniele consumes both books (good X) and magazines (good Y). At the optimal con-
sumption basket, the marginal utility of books is 40 (MUx=40), while the marginal utility
of magazines is equal to 20 (MUy=20). If the price of books is 8 (Px=8), then the price of
magazines should be 5 (Py=5).
6) If pizza and panzerotti are substitutes, a reduction in the price of panzerotti leads to a
leftward shift of the pizza demand curve.
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Part 3 - Exercises
Exercise 1
Maia has a monthly income of €500, which she spends on the purchase of two goods:
hamburgers (good X) and books (good Y). The price of a hamburger is €5, while the price
of a book is €10.
a) Write Maia's budget constraint. Graphically represent the budget line, clearly indi-
cating its intercepts and slope.
b) Considering the following situations separately, show how Maia's budget constraint
changes if:
I. the price of hamburgers increases from 5 to 10;
II. The price of books increases by 20%;
III. the price of both goods increases by 50%;
IV. the price of books increases by 20%, and the price of hamburgers decreases
by 20%.
Exercise 2
Greta consumes only books (good X) and sandwiches (good Y). The unit price of books is
8 (Px=8), while that of sandwiches is 10 (Py=10). Greta has an income of 800 (M=800).
Greta's preferences for the considered goods can be represented by the following utility
function: U(X,Y) = X0,4 Y0,6.
a) Write Greta’s budget constraint. Graphically represent the budget line, clearly in-
dicating its intercepts and slope.
b) Given Greta’s utility function, the marginal rate of substitution is MRS =
MUx/MUy = (2/3)(Y/X). Calculate Greta's optimal choice and represent it on the
previous graph.
c) After a year, inflation has raised the unit price of books from 8 to 12 and the price
of sandwiches from 10 to 15. By how much must Greta's monthly income increase
so that at her new optimal choice, she can achieve the same level of utility as the
previous year? [You can answer without calculating the new equilibrium basket].
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Exercise 3
Consider the choice of a parent who must decide how much to spend on their daughter's
education and how much on other goods. Let X represent the number of hours of lessons
for the daughter and Y represent all other goods. The price of all other goods is unitary (py
= 1). The cost of 1 hour of lessons is €6, and the parent's monthly income is €900. The
parent's preferences are represented by the utility function: U(X,Y)=XY2.
a) Write the parent's budget constraint and illustrate it on a graph, specifying inter-
cepts and slope.
b) Knowing that the marginal rate of substitution is (1/2)Y/X, find the equilibrium
and represent it on the previous graph.
c) Suppose the government considers it important that its citizens receive a minimum
of 60 monthly hours of education. To achieve this, the government provides a fixed
subsidy of 90 euros per month to each family, allowing families to spend it as they
see fit. Will the government be able to attain its objective?
