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Tutorial Chapter 3 Consumer Behaviour Questions Compress

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17 views

Tutorial Chapter 3 Consumer Behaviour Questions Compress

Uploaded by

Abemelek t
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© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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Introduction to Economics

Chapter Three
Theory of Consumer Behaviour

Assignment Questions I

For the following 2 questions, please answer "True" or "False" and explain why.

1. The slope of the budget line represents the rate at which the consumer is willing to trade one
good for another at any given bundle.

2. An increase in a consumer's income will increase the Marginal Rate of Transformation.

Analytical Questions:

1. Draw the indifference curves for Banana and Orange for each of the following: and find
MRS o ,b ¿ MRS b ,oob
a. B(10,20,40,60 120)
b. Or ( 15, 30, 45,60,90)

2. The preferences for Hana can be represented by the following utility function:
U(X,Y) = XaY1-a. She faces the budget constraint I = p.X + q.Y, where I is the Hana’s income, and p
and q are the prices.
If her income is 500Birr wants to buy Biscuit and Cream Cake (B,C) with price of 50 and
60 Birr respectively.
a) Draw the graph of the budget line
b) What quatities of each she can buy ?
c) If the price of Cream cake increases by 10% show the effect on the graph shifted.
d) Repeat q(b) if the price of biscuit and her income increases by 20% simultaneously

3. Johnny has $100 to spend on books and all other goods. Books cost $20 each and Johnny is at
equilibrium consuming 3 books and $40 worth of other goods. Johnny's grandmom wants to give
Johnny either a book or $20 for his birthday. Which gift does Johnny prefer? Explain using an
indifference map and budget lines.

4. Joe subscribes to an Internet provider that charges $2 per hour. He has $100 per month to
spend and is at equilibrium by buying 10 hours of Internet access and $80 worth of other goods.
Draw the indifference curve and budget line. If the company switches to a $20 monthly fee for
unlimited Internet access, is Joe better off?
5. A friend whom you are studying with for this class has drawn three sets of indifference curves.
Explain what he has done wrong on each graph and what assumption of preferences is violated
by each particular graph.
1) If a consumer prefers Apples to Bananas and prefers Bananas to Citrus Fruit, in order to
satisfy assumptions about preferences, she has to prefer
A) Bananas to Apples.
B) Citrus Fruit to Bananas.
C) Apples to Citrus Fruit.
D) Citrus Fruit to Apples.

2) The principle that "More is better" results in indifference curves


A) sloping down.
B) not intersecting.
C) reflecting greater preferences the further they are from the origin.
D) All of the above.

3) Convexity of indifference curves imply that consumers are willing to


A) give up more "y" to get an extra "x" the more "x" they have.
B) give up more "y" to get an extra "x" the less "x" they have.
C) settle for less of both "x" and "y".
D) acquire more "x" only if they do not have to give up any "y".

4) Diminishing marginal rate of substitution can be seen when indifference curves


A) cross.
B) are concave.
C) are downward sloping.
D) become flatter as we move down and to the right.

5) If two goods are perfect substitutes, then the indifference curves for those two goods would be
A) upward sloping and concave to the origin.
B) downward sloping and convex to the origin.
C) downward sloping and straight.
D) L-shaped.

6) The indifference curves for left shoes and right shoes would most likely be
A) upward sloping and concave to the origin.
B) downward sloping and convex to the origin.
C) downward sloping and straight lines.
D) L-shaped.

7) If the utility function (U) between food (F) and clothing (C) can be represented as U = ,
holding the consumption of clothing fixed, the utility will
A) increase at an increasing speed when more food is consumed.
B) increase at an decreasing speed when more food is consumed.
C) increase at an constant speed when more food is consumed.
D) remain the same.
9. If Fred's marginal utility of pizza equals 10 and his marginal utility of salad equals 2, then
A) he would give up five pizzas to get the next salad.
B) he would give up five salads to get the next pizza.
C) he will eat five times as much pizza as salad.
D) he will eat five times as much salad as pizza.

10. If Johnny likes homework (H) but hates exercise (E), which of the following might best
represent his utility function for homework and exercise?
A) U = H + E
B) U = H/E
C) U = H2 +
D) U = H2 ×

11. If prices of both horizontal and vertical goods increase by 50%,


A) budget constraint will be unchanged.
B) slope of the budget constraint stay the same.
C) slope of the budget constraint will decrease.
D) budget constraint will shift outward in a parallel fashion

12. Joe's income is $500, the price of food (F) is $2, and the price of shelter (S) is $100. Which
of the following bundles is in Joe's opportunity set?
A) 50 units of food, five units of shelter
B) 200 units of food, two units of shelter
C) 100 units of food, one unit of shelter
D) 150 units of food, three units of shelter

13) An indifference curve represents bundles of goods that a consumer


a. views as equally desirable.
b. ranks from most preferred to least preferred.
c. refers to any other bundle of goods.
d. All of the above.

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