MICROECONOMICS’ PROBLEM SET 4

Chapter 4: Consumer Choice

1. Consumer A’s income is 1 million dong to buy 2 good: meat and potato.
a. Suppose price of meat is 20 thousands dong per kilogram, price of potato is 5 thousand
dong per kilogram. What is the budget constraint of consumer A? Show in the diagram.
b. The utility function of consumer A is as below:
𝑇𝑈 = (𝑀−2)×𝑃 (M: meat, P: potato).
What is A’s optimal choice?
c. If price of potato increases up to 10 thousands dong per kilogram. What is A’s new
budget constraint curve? What should A do to optimize the utility?
2. Consumer B use his income to spend for coffee (K) and cigarette (C) – 40 thousands dong
per day. The price of a cup of coffee and a pack of cigarette are: PK = 10.000dong and PC =
20.000dong.
The utility function of coffee and cigarette is:
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TUC = - Q 2 + 10QC ; TUT = -2QT2 + 20QT.
2 C
Define the optimal choice of consumer B. Calculate the optimal utility of consumer B.
3. The utility function of a consumer is: U ( X ,Y )=2 √ X +Y
This consumer consumes 9 X and 10 Y at initial stage. If now she reduces the amount of X
and consumes only 4 X. How many Y does she need to consume to have the same utility?
4. A college student has two options for meals: eating at the dining hall for $6 per meal, or
eating a Cup O’ Soup for $1.50 per meal. His weekly food budget is $60.
a. Draw the budget constraint showing the trade-off between dining hall meals and Cups O’
Soup. Assuming that he spends equal amounts on both goods, draw an indifference curve
showing the optimum choice. Label the optimum as point A.
b. Suppose the price of a Cup O’ Soup now rises to $2. Using your diagram from part (a),
show the consequences of this change in price. Assume that our student now spends only
30 percent of his income on dining hall meals. Label the new optimum as point B.
c. What happened to the quantity of Cups O’ Soup consumed as a result of this price
change? What does this result say about the income and substitution effects? Explain.
d. Use points A and B to draw a demand curve for Cup O’ Soup. What is this type of good
called?

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 Multiple Choices
1. Consider two goods: pizza and cola. What is the slope of the consumer's budget constraint
measured by
A) the consumer's income divided by the price of cola
B) the relative price of pizza and cola
C) the relative income that the consumer spends on pizza and cola
D) the consumer's spending on pizza divided by the consumer's income
2. If the relative price of a lift ticket at a ski resort is two times the price of a meal at a good
restaurant, what is the opportunity cost of a lift ticket
A) the slope of the budget constraint
B) the slope of the indifference curve
C) the intercept on the lift ticket axis
D) the intercept on the meal axis
3. What does the theory of consumer choice provide the foundation for understanding
A) the structure of a firm
B) the profitability of a firm
C) the product demand curve of a firm
D) the product supply curve of a firm
4. The theory of consumer choice can often provide insight into the behavior of which of the
following types of individuals
A) individuals who make rational choices
B) individuals who make constrained choices
C) individuals who are unaware of how to maximize their well-being
D) individuals who are irrational consumers
5. What does a budget constraint show
A) the prices that a consumer chooses to pay for products he consumes
B) the consumption bundles that are offered by the producer
C) the consumption bundles that a consumer can afford

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 D) the bundles of consumption that makes a consumer equally happy
6. Assume that a college student spends all of her income on macaroni and hamburger. The
price of a box of macaroni is $1.50 and a pound of hamburger costs $3.50.If she has $42 of
income, what could she choose to consume
A) 10 boxes of macaroni and 9 pounds of hamburger
B) 12 boxes of macaroni and 7 pounds of hamburger
C) 14 boxes of macaroni and 6 pounds of hamburger
D) 11 boxes of macaroni and 8 pounds of hamburger
7. What can we say about a consumer who doesn't spend all of her income
A) She is at a point outside of her budget constraint.
B) She is at a point inside her budget constraint.
C) She is not consuming positive quantities of all goods.
D) She is consuming at a point where her budget constraint touches one of the axes.
8. In what direction will a decrease in income cause a shift in the budget constraint
A) outward
B) toward the good most consumed
C) toward the good least consumed
D) inward
9. If a consumer's income decreases, in what way will the budget constraint for cola and pizza
change
A) It will shift outward, parallel to the old budget constraint.
B) It will shift inward, parallel to the old budget constraint.
C) It will rotate outward toward pizza because the consumer can afford more pizza.
D) It will rotate outward toward cola because the consumer can afford more cola.
10. Which characterization is NOT applicable to the slope of the budget constraint
A) It shows the relative price of two goods.
B) It shows the rate at which a consumer can trade one good for another.
C) It is equal to the slope of the highest indifference curve.

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 D) It is constant.
11. What do economists use to represent a consumer's preferences
A) demand curves
B) budget constraints
C) indifference curves
D) supply curves
12. If the consumption of one good is reduced, how must a consumer alter his consumption of
another good in order to remain indifferent between two bundles
A) He can reduce, increase, or not change his consumption of another good.
B) He must reduce his consumption of another good.
C) He must increase his consumption of another good.
D) He must not change his consumption of another good.
13. Which term refers to the rate at which a consumer is willing to exchange one good for
another, maintaining a constant level of satisfaction
A) the relative exchange ratio
B) the value of marginal product
C) the marginal rate of substitution
D) the relative price ratio
14. If an indifference curve is bowed inward toward the origin, what do we know about the
marginal rate of substitution
A) It is not likely to reflect the relative value of goods.
B) It is likely to be constant for all bundles along the indifference curve.
C) It is likely to be identical to the price ratio for each bundle along the indifference curve.
D) It is different for each bundle along the indifference curve.
15. How can we define the marginal rate of substitution on the graph of consumer choice
model
A) It is the slope of a budget constraint.
B) It is the ratio between the slope of a budget constraint and an indifference curve.

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 C) It is the slope of an indifference curve.
D) It is the point at which the budget constraint is tangent to the indifference curve.
16. What can we say about the amount of each good a consumer is currently consuming
A) It is only affected by price.
B) It affects the rate at which she is willing to trade.
C) It is only affected by income.
D) It will not affect the marginal rate of substitution.
17. What does a consumer's preferences provide
A) ranking of the set of bundles that happen to fall on indifference curves
B) relative ranking of bundles that provide more of all goods
C) framework for evaluating market equilibriums
D) complete ranking of all possible consumption bundles
18. Higher indifference curves are preferred to lower ones as long as which circumstance
applies
A) The marginal rate of substitution is diminishing.
B) The consumer's income remains constant.
C) Commodities in the bundle are "goods."
D) The budget constraint does not shift.
19. What does a bowed-in indifference curve reflect
A) a consumer's unwillingness to substitute one good for another
B) a consumer's desire to specialize in the consumption of one good over another
C) a consumer's decreasing willingness to give up a good that she has in abundance
D) a consumer's increasing willingness to give up a good that she has in abundance
20. When two goods are perfect substitutes, what do we know about the marginal rate of
substitution
A) It is constant.
B) It decreases as the scarcity of one good increases.

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 C) It increases as the scarcity of one good increases.
D) It increases as the abundance of one good increases.
21. When considering her budget, what is the highest indifference curve that a consumer can
reach
A) the indifference curve to which the budget constraint is tangent
B) the indifference curve farthest from the origin
C) the indifference curve that intersects the budget constraint in at least two places
D) the indifference curve for which all combinations of goods are affordable
22. Refer to Figure 21-5.The consumer is likely to select the consumption bundle associated
with which point
A) point B
B) point C
C) point D
D) point E

23. What does utility measure

A) the satisfaction a consumer receives from spending her income
B) the satisfaction a consumer receives from consuming a bundle of goods
C) the satisfaction a consumer places on her budget constraint
D) the satisfaction a consumer places on normal goods

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24. For normal goods like cola and pizza, what happens due to the substitution effect when the
price of pizza falls
A) There is a shift to a lower indifference curve, so the consumer buys more cola.
B) There is a shift to a higher indifference curve, so the consumer buys more cola.
C) There is movement along the indifference curve, so the consumer buys more cola.
D) There is movement along the indifference curve, so the consumer buys less cola.
25. What will a consumer buy if there is a shift outward in the budget constraint
A) less of normal goods and more of inferior goods
B) more of normal goods and less of inferior goods
C) more of both normal goods and inferior goods
D) less of both normal goods and inferior goods
26. What effect is due to a price change that moves the consumer along the same indifference
curve to a point with a new marginal rate of substitution
A) the budget effect
B) the preference effect
C) the substitution effect
D) the income effect
27. If goods are perfect substitutes, what is the income effect of a price change on the other
good
A) positive only
B) zero only
C) negative only
D) zero or positive
28. Refer to Table 21-1.George receives three units of utility from the last dollar spent on each
of the other goods he consumes. If cookies cost $4 per bag, how many bags of cookies will
he consume per month if he maximizes utility
A) 2 C) 4
B) 3 D) 5