Exam 3: Consumer Behavior

The following table presents Mary's 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 Mary's level of utility.

The following combinations of goods X and Y represent various market baskets. Consumption is measured in pounds per month. Market Basket Units of X Units of Y A 4 6 B 16 7 C 15 3 D 3 2 Explain which market basket(s) is(are) preferred to other(s), and if there is any uncertainty over which is preferable, point this out as well.

Tammy and Tad's father has given each of them a debit card and allows each of them to use the card to spend $500 each month. Tammy and Tad use their $500 to buy only CDs and gasoline. In February, the price of a CD was $10 and the price of gasoline was $1 per gallon. At these prices, Tammy purchased 45 CDs and 50 gallons of gas. Ted consumed 20 CDs and 300 gallons of gas. For the month of March, Tammy and Tad's father lost the records indicating who had which debit card. From the bank statement in March, their father learned that the price of a CD was $12 and a gallon of gas cost $0.80. The first debit card was used to purchase 235 gallons of gas and 26 CDs. The second debit card was used to purchase 265 gallons of gas and 24 CDs. Using revealed preference theory, identify which card Tammy must possess.

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 May's time constraint. If MU_F = and MU_P = 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?

Suppose you only consume food and clothing, and clothing is plotted on the vertical axis. Also, you purchase food at a fixed price (P_F), but the price of clothing declines as you buy in larger quantities (i.e., quantity discounts). What does the budget line look like in this case?

In the theory of consumer behavior, several assumptions are made about the nature of preferences. What are these assumptions? Illustrate the significance of these assumptions using indifference curves.

Jane is attempting to maximize utility by selecting a market basket of goods. For each of the goods in the market basket the marginal utility per dollar spent is equal. There are some goods which are affordable but do not appear in the Jane's market basket. If Jane has maximized utility, the marginal utility per dollar spent on each of the goods that does not appear in the market basket is:

The theory of consumer behavior is based on certain assumptions. The set of four basic assumptions includes:

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. Sally's 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 Sally's budget constraint. Graph the budget constraint and determine its slope. c. Determine the X,Y combination which maximizes Sally's utility, given her budget constraint. Show her optimum point on a graph. (Partial units for the quantities are possible.) (Note: MU_Y = 6XY and MU_X = 3Y².) d. Calculate the impact on Sally's 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?

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 earn 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.

Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line. Initially, the price of hot dogs is $3 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget is $48 per month. How does her optimal consumption bundle change if the price of hot dog buns increases to $5 per package?

You view tea and scones as perfect complements, and you prefer to consumer one cup of tea with one scone. Also, your indifference curves are plotted with tea on the vertical axis. If you presently have two cups of tea and one scone, what this the marginal rate of substitution (MRS) at this point?

Which of the following is NOT an assumption regarding people's preferences in the theory of consumer behavior?

Oscar consumes only two goods, X and Y. Assume that Oscar is not at a corner solution, but he is maximizing utility. Which of the following is NOT necessarily true?

The local mall has a make-your-own sundae shop. They charge customers 35 cents for each fresh fruit topping and 25 cents for each processed topping. Barbara is going to make herself a sundae. The total utility that she receives from each quantity of topping is given by the following table: Fresh Fruit Topping Processed Topping # of Units Total Utility # of Units Total Utility 1 10 1 10 2 18 2 20 3 24 3 10 4 28 4 0 5 30 5 -10 6 28 6 -20 7 24 7 -30 8 18 8 -40 9 10 9 -50 10 -6 10 -60 a. What is the marginal utility of the 6th fresh fruit topping? b. Of the two toppings, which would Barbara purchase first? Explain. c. If Barbara has $1.55 to spend on her sundae, how many fresh fruit toppings and processed toppings will she purchase to maximize utility? d. If money is no object, how many fresh fruit toppings and processed toppings will Barbara purchase to maximize utility? e. Which of the basic assumptions of preferences are violated by preferences shown in the table above?

To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. If the U.S. Congress passes an economic stimulus package that pays $300 to each person, how does this affect the budget line for each consumer?

John consumes two goods, X and Y. The marginal utility of X and the marginal utility of Y satisfy the following equations: MU_X = Y MU_Y = X. The price of X is $9, and the price of Y is $12. a. Write an expression for John's MRS. b. What is the optimal mix between X and Y in John's 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?

The local farmer's market sells corn for 20 cents an ear. At this price, Sam buys 6 ears each Thursday. What would happen to Sam's consumption of corn if the market offered corn at 20 cents an ear for the first 6 ears, but 10 cents an ear for each additional ear? Explain your answer.

What is a good argument for using the model of the consumer despite the fact that it requires making many simplifying assumptions?

Define the marginal rate of substitution. Using this concept, explain why market basket A is not utility maximizing while market basket B is utility maximizing.