Exam 3: Consumer Behavior

Indifference curves are convex to the origin because of:

Hulk goes to the gym 20 times a month. His income is $1,000 per month and his visits to the gym cost $4 per visit. a. Draw Hulk's budget line for visits to the gym and all other goods, show the consumption bundle that maximizes his satisfaction, and draw the indifference curve through that point. b. Recently, a new health club opened which offers identical facilities but which charges a flat fee of $60 per month plus $1 per visit. Draw Hulk's budget line if he were to join this new club. c. Would Hulk continue to work out at the gym or would he join the new health club. Why?

Figure 3.2.2 -Which of the following will result in a decrease in a consumer's purchasing power?

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.

If MUa/Pa is greater than MUb/Pb, and the consumer is consuming both goods, the consumer is not maximizing utility.

Alvin's preferences for good X and good Y are shown in the diagram below. Figure 3.1.6 -Refer to Figure 3.1.6. Which assumption concerning preferences do Alvin's indifference curves violate?

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?

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?

You using a Laspeyres (fixed-weight) price index to compare price changes over time, and the index is based on consumption bundles from 2005 when energy costs were lower and housing costs were higher. Your results are likely to:

Figure 3.2.4 -Refer to Figure 3.2.4. Theodore's budget line has changed from A to B. Which of the following explains the change in Theodore's budget line?

Janice Doe consumes two goods, X and Y. Janice has a utility function given by the expression: U = 4X^0.5Y^0.5. So, The current prices of X and Y are 25 and 50, respectively. Janice currently has an income of 750 per time period. a. Write an expression for Janice's budget constraint. b. Calculate the optimal quantities of X and Y that Janice should choose, given her budget constraint. Graph your answer. c. Suppose that the government rations purchases of good X such that Janice is limited to 10 units of X per time period. Assuming that Janice chooses to spend her entire income, how much Y will Janice consume? Construct a diagram that shows the impact of the limited availability of X. Is Janice satisfying the usual conditions of consumer equilibrium while the restriction is in effect? d. Calculate the impact of the ration restriction on Janice's utility.

If prices and income in a two-good society double, what will happen to the budget line?

The endpoints (horizontal and vertical intercepts) of the budget line:

To answer the question: Can money buy happiness?, a study of the relationship between GDP per capita and satisfaction with life demonstrates that:

Bill currently uses his entire budget to purchase 5 cans of Pepsi and 3 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 4, and his marginal utility from hamburgers is 6. Bill could increase his utility by:

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?

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

Figure 3.1.5 -Based on Figure 3.1.5, it can be inferred that:

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?

Figure 3.1.4 -Refer to Figure 3.1.4 above. When computing the marginal rate of substitution from point to point as we move downward across the curve, we discover: