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Consumer Theory Problem Set

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139 views2 pages

Consumer Theory Problem Set

Uploaded by

Stargazing
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Student Id. No.

Jindal School of Government and Public Policy


Problem Set- Consumer Theory

Course Name : Intermediate Microeconomics

This question paper has () printed pages (including this page).


_______________________________________________________________________________________

Questions:

1. Consider that you have two goods chocolate C and ice cream I. The price of C is pC and the price of I is
p I . The income of the consumer is M. Write out the budget constraint of the consumer. The following
questions are with regard to the budget constraint.
(a) What is the slope of the budget constraint? How do you interpret the slope.
(b) Suppose M changes while pC and p I do not. How does the budget constraint shift? Do the case
for both an increase and decrease in M.
(c) Suppose pC changes while M and p I do not. How does the budget constraint shift? Do the case
for both an increase and decrease in pC
(d) Suppose p I changes while M and pC do not. How does the budget constraint shift? Do the case
for both an increase and decrease in p I
(e) Suppose pC and M changes but p I does not. How does the budget constraint shift? There will be
4 cases to consider in this case. For example one case is, both pC and M increase. Another case is
pC increases but M decreases and so on. How does the budget constraint shift? Do all the 4 cases.
(f) Suppose p I and M changes but pC does not. How does the budget constraint shift? There will be
4 cases to consider in this case. For example one case is, both p I and M increase. Another case is
p I increases but M decreases and so on. How does the budget constraint shift? Do all the 4 cases.
(g) Now suppose all the three M, pC and p I change. How does the budget constraint shift. There will
be 8 cases to consider here. Do all the cases.
(h) Suppose there is a ration on the consumption of chocolates so that the consumer can never buy
¿
more that C chocolates. Graph the new budget constraint.

2. Consider a utility function, U ( x , y ) =x a y 1−a, where 0<a<1. Suppose the consumer has income of Rs.
500 and the prices of the two goods are given by ( p ¿ ¿ x , p y )=(10 , 5) ¿. The consumer wants to choose

End-term Examination – Spring’2024 Page 1


values of (x , y ) such that her utility is maximized. subject to the condition that her total expenditure
cannot exceed her income.

a. Derive the demand functions for x and y . You can use any method you want to.
b. Are goods x and y normal or inferior goods.
c. Now suppose the p x increases to 12. What is the substitution effect and income effect of this
price change. Calculate each.

3. Consider the utility maximization problem U ( x , y ) =x+ y such that 2 x+ y=m and x ≥ 0 and y ≥ 0.

a. What is the demand function of x and y . What method did you use to reach the said demand?
b. Suppose the price of good y increases from 1 to 1.5. What is the substitution and income effect
of this price change.

4. Consider the utility maximization problem U ( x , y ) =min {x , y } such that 2 x+ y=m and x ≥ 0 and y ≥ 0.

a. What is the demand function of x and y . What method did you use to reach the said demand?
b. Suppose the price of good y increases from 1 to 1.5. What is the substitution and income effect
of this price change.

End-term Examination – Spring’2024 Page 2

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