Intermediate Microeconomics I

Problem Set 4: Consumer Behaviour-Choice

1. If Ralph were given $10, he would spend none of it on tuna fish. But when asked, he
claims to be indifferent between receiving $10 worth tuna fish and a $10 bill. How
could this be?
2. Rani is always willing to trade one can of Coke for one can of Sprite, or one can of
Sprite for one can of Coke.
a. What can you say about Rani’s MRS?
b. If price of Coke is Rs. 2 and price of Sprite is Rs. 1.5, and Rani’s income is Rs.
100, what will Rani’s utility maximizing choice be?
c. If price of Coke is Rs. 2 and price of Sprite is Rs.2, and Rani’s income is Rs. 100,
what will Rani’s utility maximizing choice be?
3. A student is first and foremost interested in chocolates and would be willing to forgo
any quantity of milk for the smallest additional quantity of chocolates. However if the
chocolates consumption is given, the student prefers to have more milk rather than
less.
a. Draw the indifference curves to represent this preference. Explain your answer.
b. Now suppose the student gets a pocket money of Rs. 90/- a week. If chocolates
cost Rs. 5 and milk costs Rs. 3, then what will be the student’s choice?
4. Paula a former actress spends all her income attending plays and movies and likes
plays and movies, and likes plays exactly 3 times as much as she likes movies.
a. Draw Paula’s indifference map
b. Paula earns $120/ week. Play ticket costs $12 and movie costs $4. Draw the
budget line, and show the highest attainable indifference curve. How many plays
will she attend?
c. If play tickets are $12 and movie tickets are $5, how many plays will she attend?
5. Ann and Bob consume clothes (C) and food (F) only. Ann’s utility function is
𝑈 (𝐶, 𝐹) = 𝑎𝐴 𝑙𝑛 𝐶 + 𝑏𝐴 𝑙𝑛 𝐹 ,
and Bob’s utility function is
𝑈 (𝐶, 𝐹) = 𝑎𝐵 𝑙𝑛 𝐶 + 𝑏𝐵 𝑙𝑛 𝐹.
𝑎𝐴 , 𝑏𝐴 , 𝑎𝐵 , 𝑏𝐵 > 0 .
 The price of clothes is 𝑃𝐶 and the price of food is𝑃𝐹 . Ann and Bob must have the same
marginal rates of substitution (MRS) of clothes for food at the optimal level of
consumption.
6. A consumer’s preferences are representable by the following utility function:
𝑢(𝑥, 𝑦) = 𝑥 2 + 𝑦
(a) Obtain the MRS of the consumer at an arbitrary point(𝑥1 , 𝑦1 ) where 𝑥1 >
0and 𝑦1 > 0.
(b) Suppose the price of the second good (𝑦) is 1, and the price of the first good
(𝑥) is denoted by 𝑝 > 0. If the consumer’s income is 𝑚 > 0, obtain the
optimal consumption bundle of the consumer (in terms of m and p).
7. Boris budgets $9/week for his morning coffee with milk. He likes it only if it is
prepared with 4 parts coffee and 1 part milk. Coffee costs $1/oz and milk costs
$0.50/oz. How much coffee and how much milk will Boris buy per week? How will
your answer change if the price of coffee rises to $3.25/oz?
8. Sue consumes only two goods, food and clothing. The marginal utility of the last
dollar she spends on food is 12, and the marginal utility of the last dollar she spends
on clothing is 9. The price of food is $1.20/unit and price of clothing is $0.90/unit. Is
Sue maximizing her utility?
9. Charlie of the apples (𝑥𝐴 ) and bananas (𝑥𝐵 ). Charlie's utility function is
𝑈 𝑥𝐴 , 𝑥𝐵 = 𝑥𝐴 𝑥𝐵 .
Suppose that theprice of apples is 1, the price of bananas is 2, and Charlie's income is
40.
a. Can Charlie afford any bundles that give him a utility of 150?
b. Can Charlie affordany bundles that give him a utility of 300?
c. Which is the best bundle Charlie can afford?

10. Ambrose, the nut and berry consumer, has a utility function𝑈(𝑥1 , 𝑥2 ) = 4 𝑥1 + 𝑥2 ,
where𝑥1 is his consumption of nuts and 𝑥2 is hisconsumption of berries.
a. The commodity bundle (25,0) gives Ambrose a utility of 20. Otherpoints that give
him the same utility are (16,4), (9, ), (4, ), (1, ), and (0, ). Plot these points
on the commodity space
b. Suppose that the price of a unit of nuts is 1, the price of a unit of berries is 2, and
Ambrose's income is 24. Draw Ambrose's budget line. How many units of nuts does
he choose to buy?How many units of berries?
c. Now suppose that the prices are as before, but Ambrose's income is34.How many
units of nuts does he choose to buy? How many units of berries?
11. A consumer finds two goods to be perfectly substitutable. Claim: Optimal bundle for
this consumer will always be a corner solution. Is this claim True or False or
Uncertain.
12. A consumer has selected an optimal bundle of two goods that include some of each
good. The price of one good increases. Claim: Her utility is lower after the price
increase compared to before it. Is this claim True or False or Uncertain.
13. True or False. Explain.
a. If the marginal rate of substitution between good A and good B is not equal to 1
then it is possible for the two goods to be perfect substitutes.
b. When the consumer maximizes his utility over two goods, the marginal utilities of
each good are always equal.
14. Ann consumes two goods X and Y, his utility function is 𝑈(𝑋, 𝑌 ) = 2𝑋𝑌 2 . Suppose
the price of X is $10, while the price of Y is $15. Ann’s income is $500.
a. Write the expression for indifference curve when Ann gets utility level 40. And
along the indifference curve you found, calculate out the numbers of consumption of
X when Y=4.
b. Write the expression for Ann’s budget constraint, graph the budget constraint and
determine its slope.
c. Determine the X, Y combination which maximizes Ann’s utility, given her budget
constraint. And figure out what’s marginal rate of substitution (MRS) between two
goods at that maximization point.
d. Suppose now the price of X is changed to 15, calculate the impact on Ann’s optimum
choice. What’s the change to her maximized utility?