Chapter 4

Consumer Choice

 Answers to Textbook Questions

1.1 If a consumer receives more of any product, even if they have as much of that product as they
need for now, they can save the product for future use, sell the product for money, or exchange it
for other goods. Under the “free disposal” assumption, economists assume that there is no cost to
getting rid of unwanted goods—hence, people are no worse off (weakly better off) with more
goods.
1.3 An indifference curve is the set of all bundles of goods that a consumer views as being equally
desirable. Indifference curves are convex to the origin, which means they are “bowed in.” This is
due to consumers having a diminishing marginal rate of substitution, where consumers are willing
to give up more of one good to obtain another unit of a second good the more of the first good
they have. Convex indifference curves show that a consumer views two goods as imperfect
substitutes, which is common, instead of perfect complements or perfect substitutes, both of which
are rare, special cases.
1.5 If the neutral product is on the vertical axis, the indifference curves are parallel vertical lines.
2.1 As tickets to kabaddi and badminton games are perfect substitutes for Divit, his indifference
curves are straight lines with a slope of –1. This is shown in the figure below. His utility function
is U(K, B) = K + B, where K denotes “the number of tickets to kabaddi games” and B denotes “the
number of tickets to badminton games.”

2.3 This is easily shown with calculus, as follows. To show with algebra, it is probably best to show
that for any set of bundles, both functions give the same ordering. Note that dV/dU = 2U(Z,B).
Thus, V is a nondecreasing transformation of U and is therefore order preserving, that is,
U(Z*, B*) > U(Z, B) if and only if V(Z*, B*) > V(Z, B). Hence, V represents the same preference

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ordering as U does.

2.5 The marginal rate of substitution of candy bars for cake (the number of pieces of cake he is willing
to give up for one more piece of candy) is 0.5. The marginal rate of substitution of cake for candy
bars is 2. The utility function is: U(Candy, Cake) = Candy + 2 Cake, where “Candy” and “Cake”
are pieces of candy and cake consumed.

2.7

(of Z for B)
3.1 See the following figure . Let’s denote candy bar by “C” and oranges by “O.” It is given: C = 4, O
= 3, PC = $2, PO = $1.

The most he can spend on these goods, Y = 4  2 + 3  1 = 8 + 3 = $11.

The budget constraint: 2C = 1O + 11  2C - O = 11.
In the case where tax is applied to consumption of more than 10 gallons per week, the slope of the
budget constraint is –(PG /PY) up to 10 gallons and –(PG + 1)/PY beyond that. This creates a kink in
the budget constraint. See the previous figure.
3.3 A quota of 13 thousand gallons would have no effect on the opportunity set.
3.5 A budget line or budget constraint shows the bundles of goods that can be bought if the entire
budget is spent on those goods at given prices. The opportunity set is all the bundles a consumer
can buy, including all the bundles inside the budget constraint and on the budget constraint.
Income doubles to $100, and the price of pizza doubles to $2. The maximum amount of pizza Lisa
can obtain is unchanged because income and the price of pizza both double. However, Lisa can
now obtain 50 burritos, from income of $100 divided by the $2 price of burritos. Unless Lisa
consumed all pizza and no burritos before the income and price change, she is better off. However,

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if Lisa maximized utility by consuming only pizza before the changes, then it is possible that she
is equally well off (e.g., no better off).

4.1 Nothing will happen to the optimum choice because the budget constraint will not change.
Suppose the original budget constraint is PXX + PYY = M, where X and Y are the quantity of goods
consumed and M is the income. Now assume PX  2 PX , PY  2 PY , and M = 2M; thus, the new
budget constraint is
PX X  PYY  M   2P X + 2P Y = 2M  P X + P Y = M.
X Y X Y

So, the budget constraint is the same as before. As long as the constraint does not change (with the
implicit assumption that the preferences are fixed), the optimal choice will not change.
4.3 Consumers in both countries will equate their respective marginal rates of substitution with the
relative price in their respective local markets. Let pM represent the price of mangoes and pB the

price of bananas. Then, in Bangladesh, and

While in Indonesia, and

As consumers in Bangladesh have a higher marginal rate of substitution of bananas for mangoes,
mangoes are relatively more valuable to them: they are willing to trade two units of bananas for
one unit of mangoes. In contrast, mangoes are relatively less valuable to consumers in Indonesia
as a consumer there is only willing to trade half a unit of bananas for one unit of mangoes.

3
 1.5.
4.5 Andy’s marginal utility of apples divided by its price is 2 The marginal utility for kumquats

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48 Perloff • Microeconomics, Eighth Edition, Global Edition

5
 1.2.
is 4 That is, a dollar spent on apples gives him more extra utils than a dollar spent on
40
 20
kumquats. Thus, he maximizes his utility by spending all his money on apples and buying 2

of apples.
4.7
a. 50S + 50T = 500  S = T = 10 are the intercepts, and the slope = –1.
b. MRS = –MUS /MUT = –2T/2S = –T/S
c. At the optimal, the budget constraint and the indifference curve should be tangent, therefore
we should have –MRS = PS /PT  T/S = 50/50 = 1  T * = S *. Substitution gives us S * = T *
= 5.

4.9 Using Equations 4B.11 and 4B.12, we find that the necessary conditions for a utility maximum are
B  100 /[2(   )] and Z  100  / (   ).

4.11 If gasoline and ethanol were perfect substitutes, such that 1 gallon of gas equals 1 gallon of
ethanol, then consumers would only purchase the fuel with the cheaper price. That consumers do
not (or that at least 40% of consumers do not behave this way) indicates gas and ethanol are not
perfect substitutes. That is, some consumers have indifference curves (for gas and ethanol) that are
not straight lines but are instead the typical convex “curved” indifference curves. Perhaps utility
from fuel is a result of more than just energy. This would be true, for example, if it is difficult to
find stations that sell ethanol or if some believe there is a benefit to the environment from using
ethanol instead of gasoline.

4.13 For Maureen, teaspoons of sugar and cups of coffee are perfect complements. Thus, she will
consume them in fixed proportions (one teaspoon of sugar per cup of coffee). Her utility
maximizing consumption bundle will be where her budget line (L1) is just tangent to an L-shaped
indifference curve (say, I1). Her budget line and indifference curve are tangent at that point,
although budget lines with other prices would be tangent at that point as well.

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4.15 See the following figure. In the figure, it is assumed that the stamps can be sold for $0.50 per $1
worth of stamps. Thus, the budget line does not extend out to $1,100 on the money income axis.
Instead, it changes slope above $1,000 and intersects the vertical axis at $1,050.

4.17 Figure 4.12 in the textbook shows how vouchers (or food stamps) shift the budget line when they
are provided for free. If low-income mothers of young children instead paid some portion of the
face value of the voucher, the new budget line would slope downwards from Y on the vertical axis
to a point on the dotted line in Figure 4.12 between the “Budget line with food stamps” and the
“Original budget line,” and would then be parallel to the two existing budget lines to the right of
that point until it reaches the horizontal axis. The opportunity set would increase relative to the
original budget line but will be smaller than the opportunity set associated with the budget line
with food stamps.
4.19 If a wealthy person spends more on food than a poor person before the subsidy, then the wealthy

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person is more likely to be spending more than the value of the food stamps prior to receiving
them and hence is less likely to have a tangency at a point like f in Figure 4.12 in the chapter.
4.21 See the following figure. Assume the budget is $100. Compare e1 and e2. We know that you would
go to the pool fewer times if you did not purchase the membership.

5.1 See the following figure. Suppose you are at point O. Assume you are willing to accept AD units
of Y in order to give up OA units of X. On the other hand, to buy OB units of X(OA = OB), you are
willing to pay BC units of Y. Therefore, you value the same unit of X differently, depending on
whether you want to give it up or you want to buy it. The indifference curve would be DOC and
has a kink at the endowment point. The graph shows different budget constraints at three different
relative prices for X. As you can see, the optimum does not change for small changes of relative
price. Therefore, for a range of prices, the demand curve for X will be vertical.

6.1 E-books are relatively more expensive in Germany than in the United States, so the budget line for
Germany is steeper. If Max and Bob have identical indifference curves, then Max will consume
relatively more printed books than Bob does because printed books in Germany are relatively less
expensive in terms of e-books compared to the United States.
However, because the indifference curves are convex, we cannot say without additional
information the exact quantities of each type of book that Max and Bob will consume (or whether

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Bob or Max will consume more total books) when maximizing utility.
If Bob’s budget line goes through Max’s optimal bundle, then we can say that Bob will be on a
higher indifference curve than Max, but he may or may not consume more e-books than Bob does.

6.3 This explanation is not exactly the same as that in the Challenge Solution because, with the state
sales tax increase, there appears to be some substitution between online purchases and in-store
purchases (e.g., if sales taxes increase by 1%, online sales increase by 2%). If so, then the
corresponding indifference curves are convex, not straight lines, as would be the case for perfect
substitutes. If online purchases and in-store purchases were perfect substitutes (with straight-line
indifference curves), then the state sales tax increase would either have no effect on sales or would
reduce in-store sales to zero, with all sales occurring online.

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