Exam 3: Consumer Behavior

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.)

A system of rationing:

Jane lives in a dormitory that offers soft drinks and chips for sale in vending machines. Her utility function is (where S is the number of soft drinks per week and C the number of bags of chips per week), so her marginal utility of S is 3C and her marginal utility of C is 3S. Soft drinks are priced at $0.50 each, chips $0.25 per bag. a. Write an expression for Jane's marginal rate of substitution between soft drinks and chips. b. Use the expression generated in part (a) to determine Jane's optimal mix of soft drinks and chips. c. If Jane has $5.00 per week to spend on chips and soft drinks, how many of each should she purchase per week?

Pedro buys market basket A that includes 10 books at a price of $20 per book and 10 DVDs at a price of $10 per DVD. Market basket B contains 12 books and 12 DVDs. Based on this information, which of the following statements is NOT true?

If Px = Py, then when the consumer maximizes utility,

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?

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.

A consumer maximizes satisfaction at the point where his valuation of good X, measured as the amount of good Y he would willingly give up to obtain an additional unit of X, equals:

Use the following statements to answer this question: I. The equal marginal principle may be used to characterize the maximum utility consumption decision even if the diminishing MRS assumption does not hold. II) The equal marginal principle implies that the MRS at the optimal consumption bundle is always equal to the price ratio.

Consider the following three market baskets:Table 3.1 -Goods that are considered "bads" have this characteristic:

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:

Which of the following statements is not true?

Which price index tends to understate the impact of price changes on consumers?

If the quantity of good A (Q_A) is plotted along the horizontal axis, the quantity of good B (Q_B) is plotted along the vertical axis, the price of good A is P_A, the price of good B is P_B and the consumer's income is I, then the slope of the consumer's budget constraint is:

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

Figure 3.1.8 -Refer to Figure 3.1.8 above. This indifference map shows that this consumer:

Scenario 3.1: Andy derives utility from two goods, potato chips (Qp) and Cola (Qc). Andy receives zero utility unless he consumes some of at least one good. The marginal utility that he receives from the two goods is given as follows: -Refer to Scenario 3.1. If the price of potato chips is $0.50 and the price of Cola is $4.00, and Andy has an income of $14.50, how many units of potato chips will he consume?

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?

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?