Tutorial Chapter 3: Consumer Behavior

Caterina Muratori

January 20, 2021

1 Multiple Choices
Question 1
Refer to the figure below.

The way in which the indifference curves are drawn in this figure:
a represents a unique case in which two different indifference curves offer the
same level of utility.
b compares three market baskets that yield the same level of utility.
c violates the principle of transitivity in the model of consumer behavior.
d represents the usual way in which indifference curves appear on an indifference
map.

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Question 2
Refer to the figure below.

Which of the following is true concerning the consumer’s marginal rate of sub-
stitution?

a It is diminishing.

b It is positive but varies along the indifference curve.

c It is constant.

d It is zero.

Question 3
Suppose your utility function for food (F) and clothing (C) is u(F, C) = F + 4C. If
you reduce your clothing consumption by 2 units, how much do you have to increase
your food consumption in order to maintain the same utility level?

a 2 units

b 4 units

c 6 units

d 8 units

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Question 4
A consumer has $100 per day to spend on product A, which has a unit price of $ 7,
and product B, which has a unit price of $15. What is the slope of the budget line
if good A is on the horizontal axis and good B is on the vertical axis?

a -7/15

b -7/100

c -15/7

d 7/15

Question 5
To simplify our consumption models, suppose U.S. consumers only purchase food
and all other goods where food is plotted along the horizontal axis of the indifference
map. If the U.S. Congress passes an economic stimulus package that pays $ 300 to
each person, how does this affect the budget line for each consumer?

a Makes the budget line steeper

b Makes the budget line flatter

c Parallel outward (rightward) shift

d Parallel inward (leftward) shift

e None of the above

Question 6
A consumer maximizes satisfaction at the point where his valuation of good X,
measured as the amount of good Y he would willingly give up to obtain an additional
unit of X, equals:

a The magnitude of the slope of the indifference curve through that point.

b One over the magnitude of the slope of the indifference curve through that
point.

c PX /PY

d PY /PX

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Question 7
Pencils sell for 10 cents and pens sell for 50 cents. Suppose Jack, whose preferences
satisfy all of the basic assumptions, buys 5 pens and one pencil each semester. With
this consumption bundle, his MRS of pencils for pens is 3. Which of the following
is true?
a Jack could increase his utility by buying more pens and fewer pencils.

b Jack could increase his utility by buying more pencils and fewer pens.

c Jack could increase his utility by buying more pencils and more pens.

d Jack could increase his utility by buying fewer pencils and fewer pens.

e Jack is at a corner solution and is maximizing his utility.

Question 8
Andy derives utility from two goods, potato chips (Qp ) and Cola (Qc ). Andy receives
zero utility unless he consumes some of at least one good. The marginal utility that
he receives from the two goods is given as follows:

Question 8.1
Refer to scenario 8. What is the total utility that Andy will receive if he consumes
5 units of potato chips (Qp ) and no Cola drink (Qc )?
a 4 utils

b 10 utils

c 30 utils

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 d 40 utils

e none of the above

Question 8.2
Refer to scenario 8. If the price of potato chips is $0.50 and the price of Cola is
$4.00, and Andy has an unlimited income, how many units of potato chips will he
consume?

a 5

b 6

c 7

d 8

e none of the above

2 Exercises
Exercise 1
George has a fixed income and can afford at most 7 units of X if he spends his entire
income on X. Alternatively, if he spends all his income on Y, he can afford at most
6 units of Y. Draw George’s budget line and an indifference curve such that George
chooses to buy 4 pieces of X. Martha has the same income and faces the same prices,
yet she chooses to buy 2 pieces of X. In equilibrium, what is George’s subjective
value of X in terms of Y? What is Martha’s?

Exercise 2
Sally consumes two goods, X and Y. Her utility function is given by the expression
U = 3XY 2 . The current market price for X is $10, while the market price for Y is
$5. Sally’s current income is $500.

a Sketch a set of two indifference curves for Sally in her consumption of X and
Y.

b Write the expression for Sally’s budget constraint. Graph the budget con-
straint and determine its slope.

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 c Determine the X,Y combination which maximizes Sally’s utility, given her
budget constraint. Show her optimum point on a graph (Partial units for the
quantities are possible). (Note: M UY = 6XY and M UX = 3Y 2 ).

d Calculate the impact on Sally’s optimum market basket of an increase in the

Exercise 3
Janice Doe consumes two goods, X and Y. Janice has a utility function given by the
0.5 0.5
expression: U = 4X 0.5 Y 0.5 . So, M UX = 2Y
X 0.5
and M UY = 2X
Y 0.5
. The current prices
of X and Y are 25 and 50, respectively. Janice currently has an income of 750 per
time period.

a Write an expression for Janice’s budget constraint.

b Calculate the optimal quantities of X and Y that Janice should choose, given
her budget constraint. Graph your answer.

c Suppose that the government rations purchases of good X such that Janice
is limited to 10 units of X per time period. Assuming that Janice chooses
to spend her entire income, how much Y will Janice consume? Construct a
diagram that shows the impact of the limited availability of X.

d Calculate the impact of the ration restriction on Janice’s utility.

Exercise 4
The local mall has a make-your-own sundae shop. They charge customers 35 cents
for each fresh fruit topping and 25 cents for each processed topping. Barbara is going
to make herself a sundae. The total utility that she receives from each quantity of
topping is given by the following table:

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a What is the marginal utility of the 6th fresh fruit topping?

b Of the two toppings, which would Barbara purchase first? Explain.

c If Barbara has $1.55 to spend on her sundae, how many fresh fruit toppings
and processed toppings will she purchase to maximize utility?

d If money is no object, how many fresh fruit toppings and processed toppings
will Barbara purchase to maximize utility?

e Which of the basic assumptions of preferences are violated by preferences