EC 501/Zenginobuz Boğaziçi University/Fall 2021

REVIEW QUESTIONS FOR CONSUMER THEORY

(UNDERGRADUATE MICRO LEVEL)

1. Ceylan's utility function is U(xA, xB) = xAxB. the price of good A is 1 and the price
of good B is 2. If Ceylan's income is 240, how many units of bananas would she
consume if she chose the bundle that maximized her utility subject to her budget
constraint?

2. Mahir consumes two commodities, X and Y, and his utility function is

min{ x + 2y, y + 2x}. He chooses to buy 8 units of good x and 16 units of good y.
The price of good y is 0.5. What is his income?

3. Zeyna's utility function is U(x, y) = (4 ln(x1)) + x2, where x1 is her consumption of

good 1 and x2 is her consumption of good 2. Given her current income and the
current relative prices, she consumes 35 units of good 1 and 5 units of good 2. If
her income doubles, while prices stay constant, how many units of good 1 will she
consume after the change in income?

4. Bertan has a utility function U(x, y) = 2xy + 1. The prices of x and y are both $1
and Bertan has an income of $20.
a) How much of each good will he demand?
b) A tax is placed on x so that x now costs Bertan $2 while his income and the
price of y stay the same. How much good x does he now demand?
c) Would Bertan be as well off as he was before the tax if when the tax as imposed,
his income rose by an amount equal to $1 times the answer to part b?

5. With some services, e.g., phone services or pay TV, a consumer is offered a choice
of two or more payment plans. One can either pay a high ‘‘fixed fee’’ and get a low
price per unit of service or pay a low fixed fee and a high price per unit of service.
Suppose you have an income of $100. Plan A has a fixed cost of $20 with a price
of $2 per unit. Plan B has a fixed cost of $40 with a price of $1 per unit for using
the service. Let x stand for expenditure on other goods and y be consumption of the
service.
a) Write down the budget equation that you would have after you paid the fixed
cost for each of the two plans.
b) If your utility function is xy, how much y would you choose in each case?
c) Which plan would you prefer? Explain.

6. Mehtap's utility function is given by U(x, y) = min {x, 2y}. The price of each good
is $10. Find the equation that will describe the Engel curve good y.

7. Regardless of his income and regardless of prices, Burcu always spends 25% of her
income on housing, 10% on clothing, 30% on food, 15% on transportation, and 20%
on recreation. Show that the utility function U(h,c,f,t,r) = h0.25c0.1f0.3t0.15r0.2, where
h stands for housing, c for clothing, f for food, t for transportation, and r for
recreation, is a utility function that will explain Burcu's consumption pattern.

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8. A consumer has the utility function U(x,y) = x + 2y1/2. The price of good x is 2 and
the price of good y is 1. The consumer's income is 20. Calculate the income and
the substitution effects in this consumer's demand when the price of good y rises to
2.

9. Jale’s utility function is U(x, y) = x + 2y, where x is her consumption of good X

and y is her consumption of good Y. Her income is $2. The price of Y is $2. The
cost per unit of X depends on how many units she buys. The total cost of x units of
X is the square root of x. Find the optimal consumption bundle for Jale.

10. Cahide’s utility function is 𝑈 = 𝑐 + 14√𝑑 − 0.5(ℎ + 𝑙 )1, where c is money spent
on goods other than housecleaning, d is the number of hours per day that somebody
spends cleaning her house, h is the number of hours per day Cahide spends cleaning
her house, and l is the number of hours per day Cahide spends working at her job.
All of Cahide’s income comes from her job. She can work as many hours as she
wishes at a wage of $7 an hour.

a) If she cannot hire anyone to do her housecleaning, how many hours will she
spend on the job and how many hours will she spend housecleaning?
b) If she can hire a housecleaner at $5 an hour, how many hours will she work
on her job, how many hours of housecleaning will she hire, and how many
hours will she clean house?