Exam 3: Consumer Behavior

Indifference curves are convex to the origin because of:

Suppose that a consumer's increase in nominal income from the base year exceeds the inflation level given by a Paasche cost of living index for their level of purchases: ( < ) Is this information enough to imply how the consumer's level of well-being has changed? (Hint: Use a revealed preference argument.)

Which of the following statements is not true?

The assumption of transitive preferences implies that indifference curves must:

Please consider the following figure: The consumer chooses A on budget line I1 and B on budget line I2. Which of the following statements is NOT true?

Theodore's budget line has changed from A to B. Which of the following explains the change in Theodore's budget line?

The budget constraint for a consumer who only buys apples (A) and bananas (B) is P_AA + P_BB = I where consumer income is I, the price of apples is P_A, and the price of bananas is P_B. To plot this budget constraint in a figure with apples on the horizontal axis, we should use a budget line represented by the slope-intercept equation:

A consumer prefers market basket A to market basket B, and prefers market basket B to market basket C. Therefore, A is preferred to C. The assumption that leads to this conclusion is:

An ideal cost-of-living index measures:

The food stamp program provides low income households with coupons which can be exchanged for some specified dollar value worth of food. Many economists argue that this program is an inefficient means of increasing the well being of low income families. Proponents of this view argue that an equivalent cash subsidy would bring about a greater increase in the well being of the low income families receiving aid. Although many economists hold this view, not all policy analysts agree with the advocates of cash payments instead of food stamps. Advocates of the existing program argue that food stamps provide an incentive for low income families to increase the nutritional quality of their diets. a. Carefully analyze the arguments regarding increases in well being under cash payments and food stamp programs. Use graphical analysis to present your arguments. b. Critically evaluate the pros and cons of the food stamp program. Do food stamps ensure that low income families increase their consumption of food?

At commodity bundle A, which consists of only apples and oranges, Annette's marginal utility per dollar spent on apples is 10 and her marginal utility per dollar spent on oranges is 8. Diagram a representative budget constraint and indifference curve that that passes through bundle A given Annette's budget is exhausted at bundle A. Is Annette maximizing utility? Why or why not? If she is not, what could she do to increase her level of satisfaction?

Suppose that a market basket of two goods is changed by adding more of one of the goods and subtracting one unit of the other. The consumer will:

Roberta lives alone on a deserted island. She can spend her time gathering coconuts or bananas. She has 16 hours available each day and can gather 4 coconuts in an hour or 8 bananas in an hour. Diagram Roberta's budget constraint. Given that Roberta's Marginal Utility of bananas is always 25 and her Marginal utility of coconuts is always 100, what is her optimal consumption? One day an individual from a neighboring island arrives by boat and offers to exchange any number of fruits at a rate of 1 coconut for 1 banana. Diagram Roberta's budget constraint at this exchange rate assuming she will now spend all her time gathering bananas. Is Roberta better off? What does she consume?

Suppose that a consumer's increase in nominal income from the base year is exceeded by the inflation level given by a Paasche cost of living index for their level of purchases: ( < ) Show that this information implies that the consumer is strictly worse-off as compared to the base year. (Hint: Use a revealed preference argument.)

An increase in income, holding prices constant, can be represented as:

Larry lives with his parents and enjoys listening to jazz. Because of his living arrangements, his only expense is on jazz music. To earn money to buy new albums, Larry must work. Larry has 16 hours per day he could spend listening to jazz or working. Each hour he works he earns $6. Each album costs him $12. Diagram Larry's budget constraint for new jazz albums and time spent listening to jazz. If Larry's parents require him to spend two hours per day doing chores around the house, what happens to his budget constraint? Does the requirement to do chores make Larry worse off?

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. Suppose the price of hot dogs is $5 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. What is her optimal choice under this scenario?

Please consider the following figure: The consumer chooses A on budget line I1 and B on budget line I2. Which of the following rankings describes the consumer's preferences (first is highest ranked and last is lowest ranked)?

Consider the following three market baskets:Table 3.1 -Refer to Table 3.1. If preferences satisfy all four of the basic assumptions:

An individual consumes products X and Y and spends $25 per time period. The prices of the two goods are $3 per unit for X and $2 per unit for Y. The consumer in this case has a utility function expressed as: U(X,Y) = .5XY MU_X = .5Y MU_Y = .5X. a. Express the budget equation mathematically. b. Determine the values of X and Y that will maximize utility in the consumption of X and Y. c. Determine the total utility that will be generated per unit of time for this individual.