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Chapter 5 Theory of Consumer Behavior

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104 views3 pages

Chapter 5 Theory of Consumer Behavior

Uploaded by

Francis Adrian Polido
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 5: THEORY OF CONSUMER BEHAVIOR

2. Answer each part of this question using the consumption bundles shown in Figure 5.1.
Assume a consumer has complete and transitive preferences for goods X and Y and does
not experience satiation for any bundle given in Figure 5.1.
a. In a comparison of bundles A and D, this consumer could rationally make which of
the following statements: I prefer A to D, I prefer D to A, or I am indifferent between
A and D?
The consumer prefer A to D because the consumer is able to consume
greater unit than bundle D. In bundle A, the consumer consumed 60 units of good
Y and 10 units of good X while in bundle D, the consumer consumed 15 units of
good Y and 50 units of good X.
b. If this consumer is indifferent between bundles A and B, then bundle E must be
more (less, more, equally) preferred to bundle A. Explain your answer.
Since the consumer is indifferent, bundle E is more preferred to bundle A
because it is farther from the origin, which represents higher level of utility and
when utility is high, it means that the consumer enjoy the good or service they get.
c. Bundle C must be more (less, more, equally) preferred to bundle F. Explain your
answer.
It shows that even though the consumer consumed bundle C and bundle F
that have the same unit in good X which is 40 units, bundle C has a greater unit in
good Y which is 20 units compared to bundle F which has 10 units only.
d. Bundle F must be less (less, more, equally) preferred to bundle D. Explain your
answer.
Bundle F is less preferred compared to bundle D because the consumer
chose 10 units of good Y and 40 units of good X. In bundle D, consumer chose 15
units of good Y and 50 units of good X, which is greater than bundle F.

4. Fill in the blanks:


a. When demand is elastic, an increase in price causes quantity demanded to
decrease and total revenue to fall.
b. When demand is inelastic, a decrease in price causes quantity demanded to
increase and total revenue to fall.
c. When demand is unitary elastic, an increase in price causes quantity demanded to
decrease and total revenue to stay the same.
d. If price falls and total revenue falls, demand must be inelastic.
e. If price rises and total revenue stays the same, demand must be unitary elastic.
f. If price rises and total revenue rises, demand must be inelastic.

7. Suppose a consumer has the indifference map shown below. The relevant budget line is
LZ. The price of good Y is $10.
a. What is the consumer’s income?
50*$10 = $500
b. What is the price of X?
40*Px = $500
Px = 12.5
c. Write the equation for the budget line LZ.
12.5X + 10Y = 500
d. What combination of X and Y will the consumer choose? Why?
The consumer will choose 20 units of X and 25 units of Y, where
indifference curve II is tangent to budget line LZ.
e. What is the marginal rate of substitution at this combination?
MRS = Px/Py
= 12.50/10
= 1.25
f. Explain in terms of the MRS why the consumer would not choose combinations
designated by A or B.
In terms of combination A, the consumer can give up 1 unit of Y in MRS to
obtain 1 unit of X and the utility would remain constant as well as the budget line.
With this, the consumer can buy 1 more of X in trade with Px/Py units of Y, which
is less than loss of Y. The amount will leave the consumer indifferent, commercing
Px/Py units of Y for 1 unit of X must increase utility, leaving the combination A
unchosen by the consumer.
In terms of combination B, the consumer could give up 1 unit of X in MRS to
obtain more units of Y and the utility of the consumer will remain constant. The
consumer can buy Px/Py more unit of Y if 1 fewer unit X is acquired. Combination
B wouldn’t be chosen when giving up 1 unit of X to obtain more units of Y that
needs to increase its utility.
g. Suppose the budget line pivots to LM, income remaining constant. What is the
new price of X? What combination of X and Y is now chosen?
80*Px = $500
Px = 6.25
The consumer will choose 30 units of Y and 32 units of X, where
indifference curve III is tangent to budget line LM.
h. What is the new MRS?
MRS = Px/Py
= 6.25/10
= 0.625

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