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

PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) CHAPTER 4: THEORY ON CONSUMER’S BEHAVIOR PART 1: TRUE OR FALSE, EXPLAIN? When marginal utility decreases, total utility will increase at an increasing rate Consumer surplus is the area of the triangle above the price line and below demand curve Indifference curves can intersect The slope of an indifference curve always decreases as the quantity consumed of good on the horizontal axis increases In the general case, indifference curve is getting more and more flatter when the consumption of good in the vertical axis increases 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 Indifference curve always convex to the origin, indicates the law of diminishing marginal utility 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 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 units of good X in order to get 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 viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) PART 2: EXERCISES Exercise 1: A consumer has total utility function U = √𝑋 + 𝑌 She decides to spend her income of 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 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 Exercise 3: A consumer decides to spend her income of 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 = 2X0,2Y0,8 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$/unit but price of good Y remains unchanged, determine new optimal consumption combination and calculate Umax in this case Exercise 6: A consumer decides to spend her income of million dongs on two goods X and Y with PX = 10.000 dongs/unit, PY = 15.000 dongs/unit Total utility function of this consumer is U = X0,4Y0,6 Determine optimal consumption combination and calculate Umax Exercise 7: A consumer decides to spend her income of million dongs on two goods X and Y with PX = 10.000 dongs/unit, PY = 15.000 dongs/unit Total utility function of this consumer is U = 2XY Determine optimal consumption combination and calculate Umax Exercise 8: A consumer with total utility function U = X.Y2 decides to spend her income of 1,5 million dongs on two goods X and Y with PX = 10.000 dongs/unit, PY = 10.000 dongs/unit a) Determine optimal consumption combination and calculate Umax b) If I = 1,2 million dongs, determine optimal consumption combination and calculate Umax Exercise 9: A consumer with total utility function U = 2X1/2 + 5Y She decides to spend her income of 108$ on two goods X and Y with PX = 2$/unit, PY = 10$/unit Determine optimal consumption combination and calculate Umax viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) Exercise 10: A consumer has total utility function U = (X-2)Y She decides to spend her income of 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 a) Determine optimal consumption combination and calculate Umax 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 a) Determine optimal consumption combination and calculate Umax b) If total utility function of that consumer is U = 2X + 3Y, determine optimal consumption combination and calculate Umax in this case 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 a) Determine optimal consumption combination and calculate Umax b) Assume that PX remains unchanged but PY = 70$/unit, determine optimal consumption combination and calculate Umax in this case Exercise 15: A consumer has total utility function U = 3X + 4Y She decides to spend her income of million dongs on two goods X and Y with PX = 50.000 dongs/unit, PY = 40.000 dongs/unit Determine optimal consumption combination and calculate Umax Exercise 16: A consumer has total utility function U = 3X + 6Y She decides to spend her income of million dongs on two goods X and Y with PX = 50.000 dongs/unit, PY = 80.000 dongs/unit Determine optimal consumption combination and calculate Umax Exercise 17: A consumer has total utility function U = 4X + 6Y She decides to spend her income of million dongs on two goods X and Y with PX = 40.000 dongs/unit, PY = 50.000 dongs/unit Determine optimal consumption combination and calculate Umax Exercise 18: A consumer has total utility function U = 2X + 3Y She decides to spend her income of million dongs on two goods X and Y with PX = 40.000 dongs/unit, PY = 50.000 dongs/unit Determine optimal consumption combination and calculate Umax viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) Exercise 19: A consumer has total utility function U = 4X + 3Y She decides to spend her income of million dongs on two goods X and Y with PX = 50.000 dongs/unit, PY = 40.000 dongs/unit Determine optimal consumption combination and calculate Umax Exercise 20: A consumer decides to spend her income of 200$ 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 Exercise 21: A consumer has total utility function U = 3X + 5Y She decides to spend her income of million dongs on two goods X and Y with PX = 30.000 dongs/unit, PY = 50.000 dongs/unit a) Determine optimal consumption combination and calculate Umax 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 Exercise 22: A consumer has total utility function U = 2X + 3Y She decides to spend her income of 1,5 million dongs on two goods X and Y with PX = 20.000 dongs/unit, PY = 30.000 dongs/unit a) Determine optimal consumption combination and calculate Umax b) Assume that price of good Y is doubled while price of good X remains unchanged Determine new optimal consumption combination and calculate Umax in this case c) If the supplier implements a promotion campaign: buy get 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 viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) PART 3: MULTIPLE CHOICE QUESTIONS The theory of consumer behavior assumes that A consumers behave rationally, maximizing their satisfactions B consumers have unlimited money incomes C consumers not know how much marginal utility they obtain from succesive units of various products D marginal utility is constant 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 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 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 Where total utility is at a maximum, marginal utility is A negative B positive and increasing C zero D positive but decreasing 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 viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) 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 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 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 viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) 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 viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749) 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 = and MUB/PB = 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 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 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 viethoa.k52@ftu.edu.vn ... consumption combination for this consumer viethoa.k52@ftu.edu.vn PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (037 841 8 749 ) PART 3: MULTIPLE CHOICE QUESTIONS The theory of consumer behavior. .. utility function U = 4X + 6Y She decides to spend her income of million dongs on two goods X and Y with PX = 40 .000 dongs/unit, PY = 50.000 dongs/unit Determine optimal consumption combination and calculate... income of million dongs on two goods X and 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