To: Professor Mohammad Hakim Sahibzada
From: Lutfrahman Rahmani
Title: Assignment
Date: 2023-August-12
Dear Sir
Hope you are fine and doing well. Please receive the II assignment/Part II of questions
related to micro economic subject. Hope ignore the shortage.
PART II
PRODUCERS, CONSUMERS, AND COMPETITIVE MARKETS CHAPTER 3
CONSUMER BEHAVIOR
REVIEW QUESTIONS
1. What does transitivity of preferences mean?
Answer: transitivity preference is a fundamental principle shared by the most contemporary rational
perspective and descriptive models of decision making.
2. Suppose that a set of indifference curves was not negatively sloped. What could you say about the
desirability of the two goods?
Answer: the two goods are complementing.
3. Explain why two indifference curves cannot intersect.
Answer: because we can chose any area of the curve
4. Draw a set of indifference curves for which the marginal rate of substitution is constant. Draw two
budget lines with different slopes; show what the satisfaction- maximizing choice will be in each case.
What conclusions can you draw?
5. Explain why a person’s marginal rate of substitution between two goods must equal the ratio of the
price of the goods for the consumer to achieve maximum satisfaction.
Answer: the consumer is under the limitation of income and budget.
6. Explain why consumers are likely to be worse off when a product that they consume is rationed.
Answer: because they want to demand more to maximize their utility.
7. Upon merging with West Germany’s economy, East German consumers indicated a preference for
Mercedes-Benz automobiles over Volkswagen automobiles. However, when they converted their savings
into deutsche marks, they flocked to Volkswagen dealerships. How can you explain this apparent
paradox?
Answer: as Mercedes Benz is more expensive and they are under influence of their income, they have to
prefer cheaper one.
8. Describe the equal marginal principle. Explain why this principle may not hold if increasing marginal
utility is associated with the consumption of one or both goods.
Answer:
9. What is the difference between ordinal utility and cardinal utility? Explain why the assumption of
cardinal utility is not needed in order to rank consumer choices.
Answer:
10. The price of computers has fallen substantially over the past two decades. Use this drop in price to
explain why the Consumer Price Index is likely to substantially understate the cost-of-living index for
individuals who use computers intensively.
Answer: computer is not the only demand and item that can increase the quality/ index of life.
EXERCISES
1. In this chapter, consumer preferences for various commodities did not change during the analysis. Yet
in some situations, preferences do change as consumption occurs. Discuss why and how preferences
might change over time with consumption of these two commodities:
a. cigarettes
b. dinner for the first time at a restaurant with a special cuisine
2. Draw the indifference curves for the following individuals’ preferences for two goods: hamburgers and
beer.
hamburger
beer
a. Al likes beer but hates hamburgers. He always prefers more beer no matter how many hamburgers he
has.
b. Betty is indifferent between bundles of either three beers or two hamburgers. Her preferences do not
change as she consumes any more of either food.
c. Chris eats one hamburger and washes it down with one beer. He will not consume an additional unit of
one item without an additional unit of the other.
d. Doreen loves beer but is allergic to beef. Every time she eats a hamburger she breaks out in hives.
3. The price of tapes is $10 and the price of CD’s is $15. Philip has a budget of $100 and has already
purchased 3 tapes. He thus has $70 more to spend on additional tapes and CD’s. Draw his budget line. If
his remaining expenditure is made on 1 tape and 4 CD’s, show Philip’s consumption choice on the budget
line.
CDs
60$
40$ tape
4. Debra usually buys a soft drink when she goes to a movie theater, where she has a choice of three
sizes: the 8 ounce drink costs $1.50, the 12 ounce drink, $2.00, and the 16 ounce drink, $2.25. Describe
the budget constraint that Debra faces when deciding how many ounces of the drink to purchase.
(Assume that Debra can costlessly dispose of any of the soft drink that she does not want.
5. Suppose Bill views butter and margarine as perfectly substitutable for each other.
a. Draw a set of indifference curves that describes Bill’s preferences for butter and margarine.
b. Are these indifference curves convex? Why?
c. If butter costs $2 per package, while margarine costs only $1, and Bill has a $20 budget to spend for the
month, which butter-margarine market basket will he choose? Can you show this graphically?
c. Connie’s supermarket has a special promotion. If she buys 20 pounds of potatoes (at $2 per pound),
she gets the next 10 pounds for free. This offer applies only to the first 20 pounds she buys. All potatoes
in excess of the first 20 pounds (excluding bonus potatoes) are still $2 per pound. Draw her budget
constraint.
d. An outbreak of potato rot raises the price of potatoes to $4 per pound. The supermarket ends its
promotion. What does her budget constraint look like now? What combination of meat and potatoes
maximizes her utility?
12. The utility that Jane receives by consuming food F and clothing C is given by: u(F,C) = FC.
a. Draw the indifference curve associated with a utility level of 12 and the indifference curve associated
with a utility level of 24. Are the indifference curves convex?
b. Suppose that food costs $1 a unit, clothing costs $3 a unit, and Jane has $12 to spend on food and
clothing. Graph the budget line that she faces.
c. What is the utility-maximizing choice of food and clothing? (Hint: Solve the problem graphically.)
d. What is the marginal rate of substitution of food for clothing when utility is maximized?
e. Suppose that Jane buys 3 units of food and 3 units of clothing with her $12 budget. Would her marginal
rate of substitution of food for clothing be greater or less than 1/3? Explain.
13. The utility that Meredith receives by consuming food F and clothing C is given by u(F,C) = FC. Suppose
that Meredith’s income in 1990 is $1,200 and the prices of food and clothing are $1 per unit for each.
However, by 1995 the price of food has increased to $2 and the price of clothing to $3. Let 100 represent
the cost of living index for 1990. Calculate the ideal and the Laspeyres cost-of-living index for Meredith
for 1995. (Hint: Meredith will spend equal amounts on food and clothing with these preferences.)
MULTIPALCHIOCE
Chapter 3
Consumer Behavior
- The theory of consumer behavior is based on certain assumptions. The set of four basic
assumptions includes:
A) completeness
B) transitivity
C) intransitivity
D) Both A and B are correct.
E) Both A and C are correct.
6) A consumer prefers market basket A to market basket B, and prefers market basket B to
market basket C. Therefore, A is preferred to C. The assumption that leads to this conclusion
is:
A) transitivity. B) completeness. C) all goods are good. D) diminishing MRS. E)
assumption of rationality
10) The slope of an indifference curve reveals:
A) that preferences are complete.
B) the marginal rate of substitution of one good for another good
C) the ratio of market prices D) that preferences are transitive.
E) none of the above
13) Indifference curves are convex to the origin because of:
A) transitivity of consumer preferences.
B) the assumption of a diminishing marginal rate of substitution. C) the assumption that
more is preferred to less.
D) the assumption of completeness. E) none of the above
Alvinʹs preferences for good X and good Y are shown in the diagram below
16) Based on Figure 3.1, it can be inferred that:
A) Alvin does not consider good X as ʺgood.ʺ
B) Alvin will never purchase any of good Y.
C) Alvin regards good X and good Y as perfect substitutes. D) Alvin regards good X and good
Y as perfect complements. E) none of the above
17) Refer to Figure 3.1. Which of the following is true concerning Alvinʹs marginal rate of
substitution?
A) It is diminishing.
B) It is positive but varies along the indifference curve. C) It is constant.
D) It is zero.
18)Refer to Figure 3.1. Which assumption concerning preferences do Alvinʹs indifference
curv es violate?
A) Diminishing marginal rates of substitution
B) Transitivity of preferences
C) More is preferred to less D) Completeness
Alvinʹs preferences for good X and good Y are shown in the diagram below.
19) Based on Figure 3.2, it can be inferred that:
A) Alvin does not consider good X as ʺgood.ʺ
B) Alvin will never purchase any of good Y.
C) Alvin regards good X and good Y as perfect substitutes. D) Alvin regards good X and good
Y as perfect complements. E) none of the above
20) Refer to Figure 3.2. At any consumption bundle with the quantity of good X exceeding
the quantity of good Y (that is, a bundle located below the 45 degree line, like point
A), Alvinʹs marginal rate of substitution of good X for good Y is A) diminishing.
B) positive. C) constant and positive. D) zero.
21)Refer to Figure 3.2. Which assumption concerning preferences do Alvinʹs indifference
curv es violate?
A) Diminishing marginal rates of substitution
B) Transitivity of preferences
C) More is preferred to less D) Completeness E)bothAandC
Consider the following three market baskets:
25) Refer to Table 3.1. If preferences satisfy all four of the basic assumptions: A) A is on the
same indifference curve as B.
B) B is on the same indifference curve as C.
C) A is preferred to C.
D) B is preferred to A.
E) Both A and B answer choices are correct.
26) Refer to Table 3.1. Which of the following can not be true? A) The consumer could
be indifferent between A and B.
B) A and C could be on the same indifference curves. C) The consumer could be
indifferent between B and C. D) A and C could be on different indifference curves.
32) Refer to the indifference curve in Figure 3.3. Which of the following statements is
correct? A) This individual receives no satisfaction from Good A.
B) This individual receives no satisfaction from Good B.
C) This individual will only consume A and B in fixed proportions.
D) none of the above
33) Refer to the indifference curve in Figure 3.3. Which of the following statements is
correct? A) MU(A) = 0.
B) MU(B) =0.
C) MU(A) is negative.
D) MU(B) is negative.
34)Refer to the indifference curve in Figure 3.3. Which of the following is true about the
MRS? A) It is negative.
B) It is positive.
C) It is equal to zero.
D) It is undefined.
35) The magnitude of the slope of an indifference curve is: A) called the marginal rate of
substitution.
B) equal to the ratio of the total utility of the goods.
C) always equal to the ratio of the prices of the goods.
D) all of the above E) A and C only
37) If X and Y are perfect substitutes, which of the following assumptions about indifference
curves is not satisfied?
A) Completeness
B) Transitivity
C) More is preferred to less D) Diminishing MRS
E) none of the above (All of the above assumptions are satisfied.)
45)A consumer has $100 per day to spend on product A, which has a unit price of $7, and
prod uct 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
46)Suppose that the prices of good A and good B were to suddenly double. If good A is
plotte d along the horizontal axis,
A) the budget line will become steeper.
B) the budget line will become flatter.
C) the slope of the budget line will not change.
D) the slope of the budget line will change, but in an indeterminate way.
47)Theodoreʹs budget line has changed from A to B. Which of the following explains the
chan ge in Theodoreʹs budget line?
A) The price of food and the price of clothing increased.
B) The price of food increased, and the price of clothing decreased. C) The price of food
decreased, and the price of clothing increased.
D) The price of food and the price of clothing decreased. E) none of the above
54) The budget constraint for a consumer who only buys apples (A) and bananas (B) is PAA +
PBB
= I where consumer income is I, the price of apples is PA, and the price of bananas is PB. To
plot this budget constraint in a figure with apples on the horizontal axis, we should use a
budget line represented by the slope-intercept equation:
A) A = -I/PA + (PB/PA)B B) A =I/PA- (PB/PA)B C) B = -I/PB + (PA/PB)A D) B =I/PB- (PA/PB)A
59)A consumer maximizes satisfaction at the point where his valuation of good X, measured
a s 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
62) An individual consumes only two goods, X and Y. Which of the following expressions
represents the utility maximizing market basket?
A) MRSxy is at a maximum.
B) Px/Py = money income.
C) MRSxy = money income. D) MRSxy = Px/Py.
E) all of the above
75) Marginal utility measures:
A) the slope of the indifference curve.
B) the additional satisfaction from consuming one more unit of a good. C) the slope of the
budget line.
D) the marginal rate of substitution.
E) none of the above
76)Oscar consumes only two goods, X and Y. Assume that Oscar is not at a corner solution,
bu t he is maximizing utility. Which of the following is NOT necessarily true?
A) MRSxy = Px/Py.
B) MUx/MUy = Px/Py.
C) Px/Py = money income.
D) Px/Py = slope of the indifference curve at the optimal choice. E) MUx/Px = MUy/Py.
Scenario 3.1: 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:
77)Refer to Scenario 3.1. 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
D) 40 utils
E) none of the above
78)Refer to Scenario 3.1. If the price of potato chips is $0.50 and the price of Cola is $4.00,
an d 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 76
79)Refer to Scenario 3.1. If the price of potato chips is $0.50 and the price of Cola is $4.00,
an d Andy has an income of $14.50, how many units of potato chips will he consume?
A)5 B)6 C)7
D)8
E) none of the above
81) If Px = Py, then when the consumer maximizes utility, A) X must equal Y.
B) MU(X) must equal MU(Y).
C) MU(X) may equal MU(Y), but it is not necessarily so. D) X and Y must be substitutes.
82) Monica consumes only goods A and B. Suppose that her marginal utility from consuming
good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price
of A is $0.50, the price of B is $4.00, and the Monicaʹs income is $120.00, how much of good
A will she purchase?
A)0 B)12 C)24 D)48 E)120
94)
Match the following descriptions of preferences to the indifference curve diagrams that
follow .
________ Ann does not care whether she has more diet soft drinks or fewer diet soft drinks.
________ Peter is very picky about his buttered popcorn. He tops every quart of popped
corn with exactly one quarter cup of melted butter.
________ Amy likes M&Mʹs, plain and peanut. For Amy, the marginal rate of substitution
between plain and peanut M&Mʹs does not vary with the quantities
of plain and peanut M&Mʹs she consumes.
________ George dislikes broccoli and would be willing to pay something to not have to eat
it.
________ Natalya likes rap and rock music. Natalyaʹs preferences exhibit a diminishing
marginal rate of substitution between the two types of music.
________ Matthew knows his limit. He likes beer up to a point, but if he drinks too much he
gets sick.
98) Consider Garyʹs utility function: U(X,Y) =5 XY, where X and Y are two goods. If the
individual consumed 10 units of X and received 250 units of utility, how many units of Y
must the individual consume? Would a market basket of X = 15 and Y = 3 be preferred to the
above combination? Explain.
100)In the theory of consumer behavior, certain axioms about the nature of preferences
imply thatindifferencecurvescannotcross. Whichaxiomsimplythis?Explainyouranswerusinga
diagram and using words.
101) In the field of financial management it has been observed that there is a trade-
off between the
rate of return that one earns on investments and the amount of risk that one must bear to
ear n that return.
a. Draw a set of indifference curves between risk and return for a person that is risk averse
(a person that does not like risk).
b. Draw a set of indifference curves for a person that is risk neutral (a person that does not
care about risk one way or the other).
c. Draw a set of indifference curves for a person that likes risk.
112) Sally consumes two goods, X and Y. Her utility function is given by the expression
U = 3 · XY2. The current market price for X is $10, while the market price for Y is $5. Sallyʹs
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 Sallyʹs budget constraint. Graph the budget constraint and
determine its slope. c.
Determine the X,Y combination which maximizes Sallyʹs utility, given her budget
constraint. Show her optimum point on a graph. (Partial units for the quantities are
possible.) (Note:MUY = 6XY and MUX = 3Y2.) d.
Calculate the impact on Sallyʹs optimum market basket of an increase in the price of X to
$15. What would happen to her utility as a result of the price increase?
119)
Jane lives in a dormitory that offers soft drinks and chips for sale in vending machines. Her
utility function is U = 3SC (where S is the number of soft drinks per week and C the number
of bags of chips per week), so her marginal utility of S is 3C and her marginal utility of C is 3S.
Soft drinks are priced at $0.50 each, chips $0.25 per bag.
a. Write an expression for Janeʹs marginal rate of substitution between soft drinks and chips.
b. Use the expression generated in part (a) to determine Janeʹs optimal mix of soft drinks
and chips.
c. If Jane has $5.00 per week to spend on chips and soft drinks, how many of each should
she purchase per week?
120)An individual consumes products X and Y and spends $25 per time period. The prices of
t he
two goods are $3 per unit for X and $2 per unit for Y. The consumer in this case has a utility
function expressed as:
U(X,Y) = .5XY MUX = .5Y MUY = .5X.
a. Express the budget equation mathematically.
b. Determine the values of X and Y that will maximize utility in the consumption of X and Y.
c. Determine the total utility that will be generated per unit of time for this individual.
121)Janice Doe consumes two goods, X and Y. Janice has a utility function given by the
expres sion:
U = 4X0.5Y0.5. So, MUX = 2Y0.5 X0.5 and MUY = 2X0.5 Y0.5 .
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 Janiceʹs 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. Is Janice satisfying the usual conditions of consumer equilibrium while the
restriction is in effect?
d. Calculate the impact of the ration restriction on Janiceʹs utility
124) If MUa/Pa is greater than MUb/Pb, and the consumer is consuming both goods, the
consumer is not maximizing utility. True or false. Explain.
125) John consumes two goods, X and Y. The marginal utility of X and the marginal utility of
Y satisfy the following equations: MUX = Y MU Y = X. ThepriceofXis$9,andthepriceofYis$12.
a. Write an expression for Johnʹs MRS.
b. What is the optimal mix between X and Y in Johnʹs market basket?
c. John is currently consuming 15 X and 10 Y per time period.
Is he consuming an optimal mix of X and Y?
128) The following table presents Maryʹs marginal utility for each of the four goods she
consumes to exhaust her income. The price of Good 1 is $1, the price of Good 2 is $2, the
price of Good 3 is $3 and the price of Good 4 is $4. Indicate the consumption bundle in the
table that maximizes Maryʹs level of utility.
130) May enjoys spending her free time with her friends at the mall and solving problems
from her microeconomics text. She has 16 hours per week of free time. Diagram Mayʹs time
constraint. If MUF = 3 4 P F 1/4 and MUP = 1 4 F P 3/4 where F is her time spent with friends
at the mall and P is her time spent working problems, how much time should May spend at
each activity?
131) Suppose the table below lists the price and consumption levels of food and clothing
during 1990 and 2000. Calculate a Laspeyres and Paasche index using 1990 as the base year.
