Chapter 4 THEORY ON CONSUMER’S BEHAVIOR of PRINCIPLES OF MICROECONOMICS

Chapter 4 THEORY ON CONSUMER’S BEHAVIOR of PRINCIPLES OF MICROECONOMICS of Microeconomics Seventh Edition 7th N.Greogory Mankiw Business Administration (Faculty of Business Administration) Exercises for practice

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CHAPTER 4: THEORY ON CONSUMER’S BEHAVIOR

PART 1: TRUE OR FALSE, EXPLAIN?

1 When marginal utility decreases, total utility will increase at an increasing rate

2 Consumer surplus is the area of the triangle above the price line and below demand curve

3 Indifference curves can intersect

4 The slope of an indifference curve always decreases as the quantity consumed of good on

the horizontal axis increases

5 In the general case, indifference curve is getting more and more flatter when the consumption

of good in the vertical axis increases

6 When moving down along an indifference curve in the general case and sacrificing the same

amount of goods on the vertical axis, there will be an increasing amount of goods represented

on the horizontal axis

7 Indifference curve always convex to the origin, indicates the law of diminishing marginal

utility

8 The shape of an indifference curve in the general case usually depends on whether consumers

prefer good X to good Y or good Y to good X

9 Two perfect complementary goods have constant marginal rate of substitution

10 If the utility function is U = (5X + 7Y)3 then X and Y are complementary goods

11 If the utility function is U = (3X + 2Y)4 then X and Y are perfect substitutes

12 If consumer's income increases, the slope of budget line will change

13 Budget line shifts outward when price of one good changes, other things equal

14 If price of good X changes while income and price of good Y remains unchanged, budget

line will shift parallel

15 If income and price of good X decrease by two times while price of good Y remains

unchanged then budget line will pivot outward and become flatter

16 If income and price of good Y increase by three times while price of good X remains

unchanged then budget line will rotate inward and become steeper

17 If MUX/MUY = 1/3 and PX/PY = 0.3 then consumer should buy more of good X and less of

good Y in order to achieve optimal consumption combination

18 If MUX/MUY = 3/4 and PX/PY = 0.75 then consumer should buy more of good Y and less

of good X in order to achieve optimal consumption combination

19 A consumer is willing to trade off 3 units of good X in order to get 1 unit of good Y, given

price of good Y is equal to 1/3 of the price of good X, so this consumer should buy more of

good X and less of good Y to achieve optimal consumption combination

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PART 2: EXERCISES Exercise 1: A consumer has total utility function U = √𝑋2+ 𝑌2 She decides to spend her

income of 2 million dongs on two goods X and Y with PX = 30.000 dongs/unit, PY = 40.000

dongs/unit

a) Determine optimal consumption combination and calculate Umax

b) Determine new optimal consumption combination so that this consumer can gain U = 100

Calculate minimum expenditure of consumer in this case

Exercise 2: A consumer decides to spend her income of 3 million dongs on two goods X and

Y with PX = 20.000 dongs/unit, PY = 50.000 dongs/unit Total utility function of this consumer

is U = 2X0,3Y0,6 Determine optimal consumption combination and calculate Umax

Y with PX = 20.000 dongs/unit, PY = 50.000 dongs/unit Total utility function of this consumer

is U = 2X0,2Y0,8 Determine optimal consumption combination and calculate Umax

Exercise 4: A consumer has total utility function U = √XY She decides to spend her income of

60$ on two goods X and Y with PX = 3$/unit, PY = 1$/unit Determine optimal consumption

combination and calculate Umax

Exercise 5: A consumer has total utility function U = XY She decides to spend her income of

120$ on two goods X and Y with PX = 3$/unit and PY = 4$/unit

a) Determine optimal consumption combination and calculate Umax

b) If PY = 2$/unit but price of good Y remains unchanged, determine new optimal consumption

combination and calculate Umax in this case

Y with PX = 10.000 dongs/unit, PY = 15.000 dongs/unit Total utility function of this consumer

is U = X0,4Y0,6 Determine optimal consumption combination and calculate Umax

Y with PX = 10.000 dongs/unit, PY = 15.000 dongs/unit Total utility function of this consumer

is U = 2XY Determine optimal consumption combination and calculate Umax

Exercise 8: A consumer with total utility function U = X.Y2 decides to spend her income of 1,5

million dongs on two goods X and Y with PX = 10.000 dongs/unit, PY = 10.000 dongs/unit

b) If I = 1,2 million dongs, determine optimal consumption combination and calculate Umax

Exercise 9: A consumer with total utility function U = 2X1/2 + 5Y She decides to spend her

income of 108$ on two goods X and Y with PX = 2$/unit, PY = 10$/unit Determine optimal

consumption combination and calculate Umax

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Exercise 10: A consumer has total utility function U = (X-2)Y She decides to spend her income

of 1 million dongs on two goods X and Y with PX = 20.000 dongs/unit, PY = 5.000 dongs/unit

Determine optimal consumption combination and calculate Umax

Exercise 11: A consumer has total utility function U = (Y-1)X She decides to spend her income

on two goods X and Y with PX = 10$/unit, PY = 10$/unit

a) Determine optimal consumption combination and calculate Umax when income = 1000$

b) Determine optimal consumption combination and calculate Umax when income = 1200$

Exercise 12: A consumer has total utility function U = (4X-8)Y She decides to spend her

income of 30$ on two goods X and Y with PX = 3$/unit and PY = 6$/unit

b) If price of good X is doubled but price of good Y remains unchanged, determine new optimal

consumption combination and calculate Umax in this case

Exercise 13: A consumer has total utility function U = 4XY She decides to spend her income

of 900.000 dongs on two goods X and Y with PX = 10.000 dongs/unit, PY = 15.000 dongs/unit

b) If total utility function of that consumer is U = 2X + 3Y, determine optimal consumption

Exercise 14: A consumer has total utility function U = 2X + 9Y She decides to spend her

income of 1800$ on two goods X and Y with PX = 20$/unit, PY = 90$/unit

b) Assume that PX remains unchanged but PY = 70$/unit, determine optimal consumption

income of 2 million dongs on two goods X and Y with PX = 50.000 dongs/unit, PY = 40.000

dongs/unit Determine optimal consumption combination and calculate Umax

Exercise 17: A consumer has total utility function U = 4X + 6Y.She decides to spend her

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Exercise 20: A consumer decides to spend her income of 200$ on X and Y with PX = 4$/unit,

PY = 2$/unit

a) Derive budget line function and draw the budget line

b) There is a promotion from the seller: buying 20 units of Y at the initial price, consumer will

get 10 units more free of charge This is applied on the first 30 units of Y only The following

units are still applied the price of 20.000 dongs (except the bonus) Derive budget line function

and draw new budget line

c) Assume that total utility function of this consumer is U = 2X + Y Determine optimal

consumption combination and calculate Umax

dongs/unit

b) Assume that the supplier implements a promotion campaign as follow: if consumers buy

more than 30 units of good X at the initial price, consumers will receive a 20% discount for the

remaining units they buy Determine optimal consumption combination and calculate Umax in

this case

income of 1,5 million dongs on two goods X and Y with PX = 20.000 dongs/unit, PY = 30.000

dongs/unit

b) Assume that price of good Yis doubled while price of good Xremains unchanged Determine

new optimal consumption combination and calculate Umax in this case

c) If the supplier implements a promotion campaign: buy 1 get 1 with good Y, determine

optimal consumption combination and calculate Umax in this case

Exercise 23: A consumer has total utility function U = min{3X;5Y} She decides to spend her

income of 900$ on two goods X and Y with PX = 30$/unit, PY = 50$/unit Determine optimal

consumption combination and calculate Umax for this consumer

Exercise 24: A consumer has total utility function U = min{5X;7Y} She decides to spend her

income of 740$ on two goods X and Y with PX = 5$/unit, PY = 7$/unit Determine optimal

consumption combination for this consumer

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PART 3: MULTIPLE CHOICE QUESTIONS

1 The theory of consumer behavior assumes that

A consumers behave rationally, maximizing their satisfactions

B consumers have unlimited money incomes

C consumers do not know how much marginal utility they obtain from succesive units of

various products

D marginal utility is constant

2 Marginal utility is the

A sensitivity of consumer purchases of a good to changes in the price of that good

B change in total utility realized by consuming one more unit of a good

C change in total utility realized by consuming another unit of a good divided by the

change in the price of that good

D total utility associated with the consumption of a certain number of units of a good

divided by the number of units consumed

3 Marginal utility

A is equal to total utility divided by the number of units consumed

B is equal to total utility if the demand curve is linear

C increases as more of a product is consumed

D diminishes as more of a product is consumed

4 If total utility is increasing, marginal utility

A may be decreasing, but still positive

B must also be increasing

C may be either positive or negative

D will be increasing at an increasing rate

5 Where total utility is at a maximum, marginal utility is

A negative

B positive and increasing

C zero

D positive but decreasing

6 When a consumer shifts purchases from good X to good Y, the marginal utility of

A X falls and the marginal utility of Y rises

B X rises and the marginal utility of Y falls

C both X and Y rises

D both X and Y falls

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7 Which of the following statements is correct?

A If marginal utility is diminishing, total utility must also be diminishing

B There is no relationship between how rapidly marginal utility declines and the price

elasticity of demand

C If an individual's marginal utility from a product diminishes rapidly, her demand for this

product is inelastic with respect to price

D If an individual's marginal utility from a product diminishes rapidly, her demand for this

product is elastic with respect to price

8 An increase in the price of product A will

A increase the marginal utility per dollar spent on A

B decrease the marginal utility per dollar spent on A

C not affect the marginal utility per dollar spent on A

D cause utility-maximizing consumers to buy more of A

9 An indifference curve shows combinations of two goods that

A would provide the consumer with the same level of satisfaction

B could be available to the consumer in a given time period

C could provide the consumer with similar levels of satisfaction

D a consumer could buy with their given income

10 Which of the following statements is NOT TRUE of indifference curves?

A They are convex to the origin

B They exhibit higher levels of utility as you move from the origin

C They are downward sloping

D They could intersect

11 The slope of any point on an indifferent curve is known as

A The trade-off rate

B The marginal rate of substitution

C The marginal rate of trade-off

D The marginal rate of indifferent

12 The indifferent curve of the two-perfect complementary goods is

A L-shaped C Concave

B Linear D Convex

13 When the price of a good changes, ceteris paribus, the budged line will

A Rotate

B Rotate and shift

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C Shift outward, parallel to the previous one

D Shift inward, parallel to the previous one

14 Suppose you have a limited money income and you are purchasing products A and B

whose prices happen to be the same To maximize your utility you should purchase A and

B in such amounts that

A their marginal utilities are the same

B their total utilities are the same

C their marginal and total utilities are proportionate

D the income and substitution effects associated with each are equal

15 To maximize utility a consumer should allocate money income so that the

A elasticity of demand on all products purchased is the same

B marginal utility obtained from the last dollar spent on each product is the same

C total utility derived from each product consumed is the same

D marginal utility of the last unit of each product consumed is the same

16 In introducing the opportunity cost of time into the theory of consumer behavior we

find that, all else equal

A one should consume less of time-intensive goods

B one should consume more of time-intensive goods

C the consumer's equilibrium position is not altered

D the marginal utility derived from each product must be multiplied by consumption time

in determining equilibrium

17 A consumer with a given income will maximize their utility when

A the marginal utilities derived from each good consumed are proportional to their prices

B the marginal utility derived from each commodity is equal

C the marginal utility derived from each product consumed is zero

D the total utility derived from each commodity consumed is equal

18 A consumer is maximizing her utility with a particular money income when

A the total utility derived from each product consumed is the same

B MUa/Pa = MUb/Pb = MUc/Pc = = MUn/Pn

C MUa = MUb = MUc = = MUn

D Pa = Pb = Pc = = Pn

19 If the price of good X rises, then the resulting decline in the amount purchased will

A necessarily increase the consumer's total utility from his total purchases

B increase the marginal utility of this good

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C increase the total utility from purchases of this good

D reduce the marginal utility of a dollar spent on this good

20 Suppose that MUx/Px exceeds MUy/Py To maximize utility the consumer who is

spending all her money income should buy

A less of X only if its price rises

B more of Y only if its price rises

C more of Y and less of X

D more of X and less of Y

21 Ben is exhausting his money income consuming products A and B in such quantities

that MUA/PA = 5 and MUB/PB = 8 Ben should purchase

A more of A and less of B

B more of B and less of A

C more of both A and B

D less of both A and B

22 The marginal utility of the last unit of A consumed is 12 and the marginal utility of the

last unit of B consumed is 8 What set of prices for A and B respectively would be

consistent with consumer equilibrium?

A $4 and $6 C $8 and $12

B $6 and $4 D $16 and $9

23 Suppose that Elizabeth is currently exhausting her money income by purchasing 10

units of A and 8 units of B at prices of $2 and $4 respectively The marginal utility of the

last units of A and B are 16 and 24 respectively These data suggest that Elizabeth

A has preferences that are at odds with the principle of diminishing marginal utility

B considers A and B to be complementary goods

C should buy less A and more B

D should buy less B and more A

24 Assume you are spending your full budget and purchasing such amounts of X and Y

that the marginal utility from the last units consumed is 40 and 20 utils respectively

Assume the prices of X and Y are $8 and $4 respectively, you

A should substitute X for Y until the marginal utility per hour is the same for both

products

B are consuming X and Y in the optimal amounts

C should consume less of Y and more of X

D should consume less of X and more of Y

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