6.3 Understanding Consumer Theory – Principles Of Microeconomics

Exercises 6.3

1. In the diagram below, a consumer maximizes utility by choosing point A, given BL1.

Suppose that both goods x and y are normal and the budget line shifts to BL2. Which of the following could be the new optimal consumption choice?

a) B. b) C. c) D. d) Either B or C or D.

2. Suppose that, given the consumption bundle x = 10 and y = 10, a consumer’s MRS is equal (in absolute value) to 4. The price of x is $1 and the price of good y is $0.25, and the bundle x = 10 and y = 10 uses up all the consumers income. The consumer’s preferences are strictly convex. Which of the following is TRUE?

a) To maximize utility the consumer should but more x and less y. b) To maximize utility the consumer should buy less x and more y. c) The bundle x = 10 and and y = 10 maximizes the consumer’s utility. d) To maximize utility the consumer should buy more of both x and y.

3. The diagram below illustrates the effect of a decrease in the price of good y, for a given consumer.

Which of the following statements is TRUE?

a) Goods x and y are substitutes. b) Goods x and y are complements. c) Goods x and y are neither substitutes or complements. d) None of the above statements are true.

4. The diagram below illustrates the effect of a decrease in the price of good y, for a given consumer. Which of the following statements is TRUE?

a) Goods x and y are substitutes. b) Goods x and y are complements. c) Goods x and y are neither substitutes or complements. d) None of the above statements are true.

5. Refer to the indifference curve/budget line diagram below.

Suppose that a consumer initially faces budget line BL1, and thus, by choosing consumption point c, is able to achieve the utility level associated with IC1. If px decreases, then the substitution effect is the movement from ______ and the income effect is the movement from ______.

a) a to b; b to c. b) b to a; a to d. c) c to d; d to a. d) d to c; c to b.

6. Refer to the indifference curve/budget line diagram below.

This consumer has $300 in income and initially faces prices of px = $1 and py = $3. Given this, she maximized her utility at point a.

If the price of good x rises to $3, how much additional income would the consumer need, in order to be able to attain her original level of utility given the new prices?

a) There is insufficient information to determine the additional income needed. b) $450. c) $300. d) $150.

7. Refer to the indifference curve/budget line diagram below.

Suppose that a consumer initially faces budget line BL1, and thus is able to achieve the utility level associated with IC1. If py increases, then the substitution effect is the movement from ______ and the income effect is the movement from ______.

a) e to d; d to c. b) e to c; e to d. c ) e to c; c to d. d) e to f; f to d.

8. Suppose that, given the consumption bundle x = 10 and y = 10, a consumer’s MRS is equal (in absolute value) to 0.4. The price of x is $0.50 and the price of good y is $0.75, and the bundle x = 10 and y = 10 uses up all the consumers income. The consumer’s preferences are strictly convex. Which of the following is TRUE?

a) To maximize utility the consumer should buy more x and less y. b) To maximize utility the consumer should buy less x and more y. c) The bundle x = 10 and and y = 10 maximizes the consumer’s utility. d) There is insufficient information to determine what the consumer should do to maximize utility.