Exam 3: Consumer Behavior

The slope of an indifference curve reveals:

If X and Y are perfect substitutes, which of the following assumptions about indifference curves is not satisfied?

When a person consumes two goods (A and B), that person's utility is maximized when the budget is allocated such that:

George has a fixed income and can afford at most 7 units of X if he spends his entire income on X. Alternatively, if he spends all his income on Y, he can afford at most 6 units of Y. Draw George's budget line and an indifference curve such that George chooses to buy 4 pieces of X. Martha has the same income and faces the same prices, yet she chooses to buy 2 pieces of X. In equilibrium, what is George's subjective value of X in terms of Y? What is Martha's?

You may consume ice cream or frozen yogurt, and ice cream consumption is plotted along the horizontal axis of your indifference map. The prices are denoted P_Y for frozen yogurt and P_IC for ice cream. Under what condition will you only consume frozen yogurt?

Figure 3.3 -Refer to the indifference curve in Figure 3.3. Which of the following statements about marginal utility (MU) is correct?

Draw a set of indifference curves for the following pairs of goods: a. Hamburgers and carrots for a vegetarian who neither likes nor dislikes meat. (Vegetarians do not eat meat.) b. Peanut butter and jelly for an individual that will not eat peanut butter sandwiches or jelly sandwiches, but loves peanut butter and jelly sandwiches made with two parts peanut butter and one part jelly. c. Tickets for Knott's Berry Farm (KBF) and Universal Studios (US) for a tourist that believes that KBF and US are perfect substitutes. d. Ice cream and pie if these are goods that you like, but if you consume enough of either, you get sick of them. If you are sick of a good, consuming more of it lowers your utility.

Suppose a consumer only purchases food and clothing, and food is plotted along the horizontal axis of the consumer's indifference map. If the price of food and clothing increase and income does not change, then the budget line changes by rotating:

An island economy produces only two goods, coconuts and pineapples. There are five people (A,B, C, D, and E) living on the island with these preferences: A has a strong preference for pineapples. B has a strong preference for coconuts. C doesn't care for pineapples (assigns no value to them). D doesn't care for coconuts (assigns no value to them) E will only consume pineapples and coconuts in the fixed proportion of one pineapple to one coconut. For each of these five individuals, construct a representative indifference curve with pineapples on the vertical axis and coconuts on the horizontal axis. Discuss the shape of the indifference curves and relate them to the MRS.

The Laspeyres price index tends to ________ the ideal cost-of-living index.

A team of researchers has conducted a study of the well being of the citizens of the island nation of Zarasa. Using a scale from 1 (least happy) to 10 (most happy), the researchers find that citizens who earn 100 Zarutas per year have a mean happiness of 2.0, those who earn 200 Zarutas per year have a mean happiness of 6.0, and those who earn 300 Zarutas per year have a mean happiness of 7.0. The researchers should make which of the following conclusions?

Suppose the table below lists the price and consumption levels of food and clothing during 1990 and 2000. Calculate a Laspeyres and Paasche index using 1990 as the base year.

A curve that represents all combinations of market baskets that provide the same level of utility to a consumer is called:

Consider the following three market baskets: If baskets A and B are on the same indifference curve and if indifference curves exhibit diminishing MRS:

Suppose your utility function for food (F) and clothing (C) is u(F,C) = F + 4C. If you reduce your clothing consumption by 2 units, how much do you have to increase your food consumption in order to maintain the same utility level?

Which of the following statements about the composition of price indices is NOT true?

If a consumer must spend her entire income on some combination of two commodities and chooses to spend it all on just one of the commodities then:

Lisa's budget line and her satisfaction maximizing market basket, A, are shown in the diagram below. a. Suppose that Lisa is given $50 worth of coupons that must be spent on food. How will the coupons alter Lisa's budget line? b. Suppose that Lisa is given $50 in cash instead of $50 in coupons. How will this alter Lisa's budget line? c. Is Lisa indifferent between the food coupon and cash program, or does she prefer one program over the other? Draw an indifference curve to illustrate your answer.

Suppose that the price of gasoline has risen by 50%. What happens to a consumer's level of well-being given he spends some of his income on gasoline? Diagram the impact of the increase in gas prices in a commodity space diagram, and show the relevant indifference curves. Now, if the individual's income rises just enough so that his original consumption bundle exactly exhausts his income, will the individual purchase more or less gasoline (this level of income implies the consumer can afford his original consumption bundle)? Is the individual better-off at the higher price level of gasoline with the higher income level or the original price of gas and income?

Consider Gary's utility function: U(X,Y) = 5 XY, where X and Y are two goods. If the individual consumed 10 units of X and received 250 units of utility, how many units of Y must the individual consume? Would a market basket of X = 15 and Y = 3 be preferred to the above combination? Explain.