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Lecture Slides

This document contains a lecture on consumer behavior that includes 12 multiple choice questions about concepts like indifference curves, budget constraints, marginal rates of substitution, and utility maximization. The key ideas covered are that consumers seek to maximize utility by equating their marginal rate of substitution to the relative price ratio and consuming where their budget constraint is tangent to the highest possible indifference curve.

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40 views

Lecture Slides

This document contains a lecture on consumer behavior that includes 12 multiple choice questions about concepts like indifference curves, budget constraints, marginal rates of substitution, and utility maximization. The key ideas covered are that consumers seek to maximize utility by equating their marginal rate of substitution to the relative price ratio and consuming where their budget constraint is tangent to the highest possible indifference curve.

Uploaded by

m-1511204
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Lecture 7:

Consumer Behavior I
EIA1008
Question 1
1. (Figure: Tomatoes and Carrots II) Which of the following statements is FALSE given the two goods
tomatoes and carrots?

a. Indifference curve U2 provides a higher level of utility than indifference curve U1.
b. Bundle C is preferred to bundle D.
c. Bundle A is preferred to bundle C.
d. The consumer is indifferent between bundle A and bundle D.
Question 2
2. (Figure: Tomatoes and Carrots III) This figure violates the assumption:

a. of convex indifference curves.


b. of transitivity.
c. of rankability.
d. that the more you have of a good, the less you are willing to give up to get even more of it.
Question 3

Sofia's utility is a function of golf (G) and music lessons (M), where MUG = 1/G and MUM = 1/M. What is the
equation for the marginal rate of substitution of music lessons for golf (MRSGM)?
a. GM
b. M/G
c. G/M
d. M – G
Question 4
5. (Figure: Good Y and Good X III) The indifference curve _____ indicates that the two goods, X and Y, are
relatively poor substitutes for one another, whereas the indifference curve _____ indicates that the two goods
are close substitutes for one another.

a. U1; U3
b. U3; U2
c. U2; U1
d. U3; U1
Question 5
(Figure: Good Y and Good X V) For budget constraint 2, suppose that the price of good Y is $90 per unit. What
is the price of good X?

a. $92
b. $88
c. $81
d. $102.24
Question 6
. (Figure: Good Y and Good X V) For budget constraint 1, the price of good X and the price of good Y could
equal _____, respectively.

a. $175 and $100


b. $80 and $140
c. $160 and $140
d. $6 and $4
Question 7
(Figure: Good Y and Good X) Suppose the budget constraint shifted from constraint 2 to constraint 1. What
could have caused this change?

a. a decrease in income
b. a decrease in the price of good X relative to that of good Y
c. a decrease in income and an increase in the price of good X relative to that of good Y
d. an increase in the price of good X and no change in the price of Y
Question 8

Suppose that MUX = Y and MUY = X. The prices of good X and good Y are $5 and $4, respectively. How many
units of good X does the consumer buy if she has $410 of income?
a. 15
b. 41
c. 25
d. 33
Questions
9. A consumer is using two goods (X and Y) so that her MRS is 4/3 and her relative price ratio is 7/8.
Is the consumer maximizing her utility? If so, why? If not, what must she do to move her
consumption toward equilibrium?

10. Bianca purchases coffee (C), bagels (B) and juice (J). At her current levels of consumption, her
MUC = 10, MUB = 15, and MUJ = 20. The price of coffee is $2, the price of bagels is $3, and the
price of juice is $4. Is Bianca maximizing her utility? If so, why? If not, what must she do to move
her consumption toward equilibrium?

11. Darius's utility function is U = 6XY, where the MUX = 6Y and MUY = 6X. The prices of good X and
good Y are $12 and $15, respectively. Suppose that Darius's indifference curve is tangent to his
budget constraint, where he is consuming 20 units of good X. How many units of good Y must
Darius be consuming?
Question 12

Carl's budget constraint is 75 = 10X + 4Y.

a. How many units of good X can Carl afford?


b. What is the vertical intercept of the budget constraint?
c. What is the slope of the budget constraint?
d. Can Carl afford to buy 4 units of good X and 10 units of good Y?
e. If Carl's income increases by 10%, what happens to the slope of the budget constraint?
f. What is Carl's MRSXY at the utility-maximizing point?
Solutions
Question 9
Since the MRS > price ratio, this consumer should change her consumption by purchasing more X and less Y to decrease
her MRS and move it toward the price ratio. As she consumes more X, diminishing marginal utility lowers MUX and raises
MUY, bringing the MRS closer to the relative price ratio.
Question 10
A consumer of two goods is maximizing utility if she consumes at the point where the MRS equals the relative price ratio. This
can also be interpreted as equality between the marginal utility per dollar spent across products. Bianca's MU per dollar spent
is equal across products (10/$2 = 15/$3 = 20/$4), so she is maximizing her utility.
Question 11
MRSXY = PX/PY
Y/20 = 12/15
Y = 16
Question 12
a. 75/10 = 7.5
b. 75/4 = 18.75
c. 10/4 = –2.5
d. No. (4 × $10) + (10 × $4) = $80 > $75
e. The slope remains unchanged.
f. MRS = PX/PY = 2.5

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