Chapter 10 Consumer Choice and Behavioral Economics

1) What is marginal utility and what is the law of diminishing marginal utility?

2) The increase in consumption of a good when its price falls is caused by two effects. What are
these two effects? Explain the difference between these effects.

3) Eliza consumes 12 cappuccinos and 8 apple turnovers per week. The price of a cappuccino is
$4 each and apple turnovers are $1 each.
a. What is the amount of income allocated to cappuccino and apple turnover consumption?
b. What is the price ratio (the price of cappuccinos relative to the price of apple turnovers)?
c. Explain the meaning of the price ratio you computed.
d. If Eliza maximize utility, what is the ratio of the marginal utility of cappuccinos to the
marginal utility of apple turnovers?
e. If the price of apple turnovers falls, will Eliza consume more apple turnovers, fewer apple
turnovers, or the same amount of apple turnovers? Explain your answer using the rule of equal
marginal utility per dollar.

4) Arnie Ziffel has $20 per week to spend on any combination of pineapples and green tea. The
price of a pineapple is $4 and the price of a bottle of green tea is $2. The table below shows
Arnie's utility values. Use the table to answer the questions that follow the table.

Marginal Quantity Marginal

Quantity of Total Marginal Utility per of Green Total Marginal Utility per
Pineapples Utility Utility Dollar Tea Utility Utility Dollar
1 32 1 28
2 52 2 46
3 64 3 54
4 68 4 60
5 70 5 64
6 71 6 66
7 71 7 67

a. Complete the table by filling in the blank spaces.

b. Suppose Arnold purchases 4 pineapples and 2 bottles of green tea. Is he consuming the
optimal consumption bundle? If so, explain why. If not, what combination should he buy and
why?

5) What is an indifference curve? Why can indifference curves never cross?

6) Farah has $100 to spend each month on bread and chicken. Suppose the price of bread is $4 a
loaf and the price of chicken is $5 per pound.
a. Draw her budget constraint and label it BC0. Put bread on the horizontal axis and chicken on
the vertical axis. Be sure to identify the intercept values.
b. Suppose Farah is a utility maximizer and she consumes 10 loaves of bread and 12 pounds of
chicken. On the same graph you drew in part (a), draw an indifference curve to identify her
optimal bundle. Label this bundle "E."
c. Is her budget exhausted? Verify your answer.
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d. Now suppose Farah's income falls to so that she can now devote $80 to the two goods. Prices
however remain unchanged. In the same diagram, graph her new budget constraint and label it
BC1. Be sure to identify any new intercept values.
e. Following the change in income, can Farah consume the same bundle "E"? Explain your
answer.
f. What must happen to her total utility following the decrease in her income?

7) Grant has $200 to spend each month on restaurant meals and jazz performances at his
neighborhood jazz club. The price of a typical restaurant meal is $20 and the price of a jazz
performance ticket is $10. Grant is maximizing his utility by consuming 6 restaurant meals and
attending 8 jazz performances. Suppose Grant still has $200 to spend, but the price of restaurant
meal rises to $25, while the price of jazz performance ticket drops to $8. Can it be determined if
Grant is better off or worse off than he was before the price change? Use a budget
constraint/indifference curve graph to illustrate your answer.

8) The Wong family consumes 3 pounds of fish and 5 pounds of chicken per month. The price of
fish is $8 per pound and chicken is $4 per pound.
a. What is the amount of income allocated to fish and chicken consumption?
b. What is the price ratio (the price of fish relative to the price of chicken)?
c. Explain the meaning of the price ratio you computed.
d. If the Wongs maximize utility, what must the ratio of the marginal utility of fish to the
marginal utility of chicken be equal to?
e. If the price of chicken rises, will the Wong family consume more chicken, less chicken, or the
same amount of chicken? Explain your answer using the rule of equal marginal utility per dollar.

9) Lilly Davis has $5 per week to spend on any combination of ice cream and candy. The price
of an ice cream cone is $2 and the price of a candy bar is $1. The table below shows Lilly's
utility values. Use the table to answer the questions that follow the table.

Quantity of Marginal
Total Marginal Quantity Total Marginal
Ice Cream Utility per
Utility Utility of Candy Utility Utility
Cones Dollar
1 20 1 20
2 38 2 38
3 52 3 48
4 62 4 54

a. Complete the table by filling in the blank spaces.

b. Suppose Lilly purchases 2 ice cream cones and 1 candy bar. Is she consuming the optimal
consumption bundle? If so, explain why. If not, what combination should she buy and why?

10) Gowri has $6 per day to purchase lunch. She spends all of her lunch money on pizza and iced
tea. The price of pizza is $2.00 per slice and iced tea costs $1 per bottle.
a. Draw Gowri's budget constraint and label it BC0. Put pizza on the horizontal axis and iced
tea on the vertical axis. Be sure to identify the intercept values.
b. If the price of iced tea rises to $1.20 per bottle, show what will happen to her budget
constraint in your diagram. Be sure to indicate any new intercept values.

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11) Farah has $100 to spend each month on bread and chicken. Suppose the price of bread is $4 a
loaf and the price of chicken is $5 per pound.
a. Draw her budget constraint and label it BC0. Put bread on the horizontal axis and chicken on
the vertical axis. Be sure to identify the intercept values.
b. Suppose Farah is a utility maximizer and she consumes 10 loaves of bread and 12 pounds of
chicken. On the same graph you drew in part (a), draw an indifference curve to identify her
optimal bundle. Label this bundle "E."
c. Is her budget exhausted? Verify your answer.
d. Now suppose Farah's income falls to so that she can now devote $80 to the two goods. Prices
however remain unchanged. In the same diagram, graph her new budget constraint and label it
BC1. Be sure to identify any new intercept values.
e. Following the change in income, can Farah consume the same bundle "E"? Explain your
answer.
f. What must happen to her total utility following the decrease in her income?

12) Grant has $200 to spend each month on restaurant meals and jazz performances at his
neighborhood jazz club. The price of a typical restaurant meal is $20 and the price of a jazz
performance ticket is $10. Grant is maximizing his utility by consuming 6 restaurant meals and
attending 8 jazz performances. Suppose Grant still has $200 to spend, but the price of restaurant
meal rises to $25, while the price of jazz performance ticket drops to $8. Can it be determined if
Grant is better off or worse off than he was before the price change? Use a budget
constraint/indifference curve graph to illustrate your answer.