Exam 3: Consumer Behavior

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

Suppose your utility from consuming X and Y is expressed as u(X,Y) = ln(XY) where ln() is the natural logarithm operator. Given this information, which of the following statements is NOT true?

Bobby is a college student who has $500 of income to spend each semester on books and pizzas. The price of a pizza is $10 and the price of a book is $50. Diagram Bobby's budget constraint. Now, suppose Bobby's parents buy him a $300 gift certificate each semester that can only be used to buy books. Diagram Bobby's budget constraint when he has the gift certificate in addition to his $500 income. Is Bobby better-off with the gift certificates?

If a consumer is always indifferent between an additional one grapefruit or an additional two oranges, then when oranges are on the horizontal axis the indifference curves:

An upward sloping indifference curve defined over two goods violates which of the following assumptions from the theory of consumer behavior?

Bob views apples and oranges as perfect substitutes in his consumption, and MRS = 1 for all combinations of the two goods in his indifference map. Suppose the price of apples is $2 per pound, the price of oranges is $3 per pound, and Bob's budget is $30 per week. What is Bob's utility maximizing choice between these two goods?

The following table presents Alfred's marginal utility for each good while exhausting his income. Fill in the remaining column in the table. If the price of tuna is twice the price of peanut butter, at what consumption bundle in the table is Alfred maximizing his level of satisfaction? Which commodity bundle entails the largest level of tuna fish consumption?

Use the following two statements to answer this question: I. If utility is ordinal, a market basket that provides 30 utils provides twice the satisfaction of a market basket that provides 15 utils. II. When economists first studied utility it was believed that utility was cardinal, but it was later discovered that ordinal preferences are sufficient to explain how most individual decisions are made.

Gary Franklin is a movie critic. He invented the Franklin Scale with which he rates movies from 1 to 10 (10 being best). When asked about his scale, Mr. Franklin explained "that it is a subjective measure of movie quality. A movie with a ranking of 10 is not necessarily 10 times better than a movie with a ranking of 1, but it is better. A movie with a ranking of 5 is better than a movie with a ranking of 1, but is not as good a movie with a ranking of 10. That's all it really tells you." Based on Mr. Franklin's description, his scale is:

Which of the following are examples of situations in which the standard model of the consumer may not be realistic?

Jane is trying to decide which courses to take next semester. She has narrowed down her choice to two courses, Econ 1 and Econ 2. Now she is having trouble and cannot decide which of the two courses to take. It's not that she is indifferent between the two courses, she just cannot decide. An economist would say that this is an example of preferences that:

Which of the following will result in a decrease in a consumer's purchasing power?

Evelyn Lips' preferences are depicted by the set of indifference curves in the diagram below. Her budget line is also shown in the diagram. Use the information in the diagram to answer the following questions. a. Which of the basic assumptions of consumer preferences are violated by E. Lips' indifference curves? Explain. b. The price of food is $5 per unit. What is E. Lips' income and what is the price of clothing? c. Show the market basket of food and clothing that maximizes E. Lips' satisfaction. When satisfaction is maximized, has E. Lips equated the marginal rate of substitution (of food for clothing) to the ratio of the prices (of food to clothing)? If so, explain why. If not, explain why not.

If indifference curves cross, then:

Amy is currently spending her income to maximize her satisfaction. She is renting an apartment for $900 per month as shown in the diagram below (Assume each dollar spent on housing buys 1 unit of housing. H1 represents her $900 per month apartment). a. Suppose that Amy qualifies for a government housing assistance program that will provide her with a $600 per month apartment at no charge. If she accepts the apartment, she cannot augment her expenditure on housing (for example, she cannot add $300 of her income to the $600 per month provided by the government program, and rent the $900 per month apartment), nor can she exchange the apartment for cash or other goods. How does the government program alter Amy's budget line? b. Suppose that Amy is given $600 in cash instead of the $600 per month apartment. How will this alter Amy's budget line? c. Is Amy indifferent between the housing assistance program and cash program, or does she prefer one program over the other? Draw an indifference curve to illustrate your answer.

Monica consumes only goods A and B. Suppose that her marginal utility from consuming good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price of A is $0.50, the price of B is $4.00, and the Monica's income is $120.00, how much of good A will she purchase?

Alvin's preferences for good X and good Y are shown in the diagram below. Figure 3.2 -Refer to Figure 3.2. At any consumption bundle with the quantity of good X exceeding the quantity of good Y (that is, a bundle located below the 45 degree line, like point A, Alvin's marginal rate of substitution of good X for good Y is

Bill uses his entire budget to purchase Pepsi and hamburgers, and he currently purchases no Pepsi and 6 hamburgers per week. The price of Pepsi is $1 per can, the price of a hamburger is $2, Bill's marginal utility from Pepsi is 2, and his marginal utility from hamburgers is 6. Is Bill's current consumption decision optimal?

The assumption that preferences are complete:

An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing market basket?