Microeconomics

Robert S. Pindyck, Daniel L. Rubinfeld

Chapter 3

Consumer Behavior - all with Video Answers

Educators

Chapter Questions

Problem 1

In this chapter, consumer preferences for various commodities did not change during the analysis. In some situations, however, preferences do change as consumption occurs. Discuss why and how preferences might change over time with consumption of these two commodities:
a. cigarettes.
b. dinner for the first time at a restaurant with a special cuisine.

Crystal Wang

Crystal Wang

Numerade Educator

Problem 2

Draw indifference curves that represent the following individuals' preferences for hamburgers and soft drinks. Indicate the direction in which the individuals' satisfaction (or utility) is increasing.
a. Joe has convex indifference curves and dislikes both hamburgers and soft drinks.
b. Jane loves hamburgers and dislikes soft drinks. If she is served a soft drink, she will pour it down the drain rather than drink it.
c. Bob loves hamburgers and dislikes soft drinks. If he is served a soft drink, he will drink it to be polite.
d. Molly loves hamburgers and soft drinks, but insists on consuming exactly one soft drink for every two hamburgers that she eats.
e. Bill likes hamburgers, but neither likes nor dislikes soft drinks.
f. Mary always gets twice as much satisfaction from an extra hamburger as she does from an extra soft drink.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 3

If Jane is currently willing to trade 4 movie tickets for 1 basketball ticket, then she must like basketball better than movies. True or false? Explain.

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 4

Janelle and Brian each plan to spend $\$ 20,000$ on the styling and gas mileage features of a new car. They can each choose all styling, all gas mileage, or some combination of the two. Janelle does not care at all about styling and wants the best gas mileage possible. Brian likes both equally and wants to spend an equal amount on each. Using indifference curves and budget lines, illustrate the choice that each person will make.

Karla Conrey

Numerade Educator

Problem 5

Suppose that Bridget and Erin spend their incomes on two goods, food $(F)$ and clothing (C). Bridget's preferences are represented by the utility function $U(F, C)=$ $10 F C,$ while Erin's preferences are represented by the utility function $U(F, C)=.20 F^{2} C^{2}$
a. With food on the horizontal axis and clothing on the vertical axis, identify on a graph the set of points that give Bridget the same level of utility as the bundle $(10,5) .$ Do the same for Erin on a separate graph.
b. On the same two graphs, identify the set of bundles that give Bridget and Erin the same level of utility as the bundle (15,8)
c. Do you think Bridget and Erin have the same preferences or different preferences? Explain.

Noraney Ocampo

Numerade Educator

Problem 6

Suppose that Jones and Smith have each decided to allocate $\$ 1000$ per year to an entertainment budget in the form of hockey games or rock concerts. They both like hockey games and rock concerts and will choose to consume positive quantities of both goods. However, they differ substantially in their preferences for these two forms of entertainment. Jones prefers hockey games to rock concerts, while Smith prefers rock concerts to hockey games.
a. Draw a set of indifference curves for Jones and a second set for Smith.
b. Using the concept of marginal rate of substitution, explain why the two sets of curves are different from each other.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 7

The price of DVDs $(D)$ is $\$ 20$ and the price of $\operatorname{CDs}(C)$ is $\$ 10 .$ Philip has a budget of $\$ 100$ to spend on the two goods. Suppose that he has already bought one DVD and one CD. In addition, there are 3 more DVDs and 5 more CDs that he would really like to buy.
a. Given the above prices and income, draw his budget line on a graph with CDs on the horizontal axis.
b. Considering what he has already purchased and what he still wants to purchase, identify the three different bundles of CDs and DVDs that he could
choose. For this part of the question, assume that he cannot purchase fractional units.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 8

Anne has a job that requires her to travel three out of every four weeks. She has an annual travel budget and can travel either by train or by plane. The airline on which she typically flies has a frequent-traveler program that reduces the cost of her tickets according to the number of miles she has flown in a given year. When she reaches 25,000 miles, the airline will reduce the price of her tickets by 25 percent for the remainder of the year. When she reaches 50,000 miles, the airline will reduce the price by 50 percent for the remainder of the year. Graph Anne's budget line, with train miles on the vertical axis and plane miles on the horizontal axis.

Rashmi Sinha

Numerade Educator

Problem 9

Debra usually buys a soft drink when she goes to a movie theater, where she has a choice of three sizes: the 8 -ounce drink costs $\$ 1.50$, the 12 -ounce drink $\$ 2.00$ and the 16 -ounce drink $\$ 2.25 .$ Describe the budget constraint that Debra faces when deciding how many ounces of the drink to purchase. (Assume that Debra can costlessly dispose of any of the soft drink that she does not want.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 10

Antonio buys five new college textbooks during his first year at school at a cost of $\$ 80$ each. Used books cost only $\$ 50$ each. When the bookstore announces that there will be a 10 percent increase in the price of new books and a 5 percent increase in the price of used books, Antonio's father offers him $\$ 40$ extra.
a. What happens to Antonio's budget line? Illustrate the change with new books on the vertical axis.
b. Is Antonio worse or better off after the price change? Explain.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 11

Consumers in Georgia pay twice as much for avocados as they do for peaches. However, avocados and peaches are the same price in California. If consumers in both states maximize utility, will the marginal rate of substitution of peaches for avocados be the same for consumers in both states? If not, which will be higher?

James Kiss

Numerade Educator

Problem 12

Ben allocates his lunch budget between two goods, pizza and burritos.
a. Illustrate Ben's optimal bundle on a graph with pizza on the horizontal axis.
b. Suppose now that pizza is taxed, causing the price to increase by 20 percent. Illustrate Ben's new optimal bundle.
c. Suppose instead that pizza is rationed at a quantity less than Ben's desired quantity. Illustrate Ben's new optimal bundle.

Charles Carter

Numerade Educator

Problem 13

Brenda wants to buy a new car and has a budget of $\$ 25,000 .$ She has just found a magazine that assigns each car an index for styling and an index for gas mileage. Each index runs from 1 to 10 , with 10 representing either the most styling or the best gas mileage. While looking at the list of cars, Brenda observes that on average, as the style index increases by one unit, the price of the car increases by $\$ 5000$. She also observes that as the gas-mileage index rises by one unit, the price of the car increases by $\$ 2500$
a. Illustrate the various combinations of style (S) and gas mileage (G) that Brenda could select with her $\$ 25,000$ budget. Place gas mileage on the horizontal axis.
b. Suppose Brenda's preferences are such that she always receives three times as much satisfaction from an extra unit of styling as she does from gas mileage. What type of car will Brenda choose?
c. Suppose that Brenda's marginal rate of substitution (of gas mileage for styling) is equal to $S /(4 G)$ What value of each index would she like to have in
her car?
d. Suppose that Brenda's marginal rate of substitution (of gas mileage for styling) is equal to $(3 S) / G$ What value of each index would she like to have in her car?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 14

Connie has a monthly income of $\$ 200$ that she allocates between two goods: meat and potatoes.
a. Suppose meat costs $\$ 4$ per pound and potatoes $\$ 2$ per pound. Draw her budget constraint.
b. Suppose also that her utility function is given by the equation $U(M, P)=2 M+P .$ What combination of meat and potatoes should she buy to maximize her utility? (Hint: Meat and potatoes are perfect substitutes.)
c. Connie's supermarket has a special promotion. If she buys 20 pounds of potatoes (at $\$ 2$ per pound), she gets the next 10 pounds for free. This offer applies only to the first 20 pounds she buys. All potatoes in excess of the first 20 pounds (excluding bonus potatoes are still $\$ 2$ per pound. Draw her budget constraint.
d. An outbreak of potato rot raises the price of potatoes to $\$ 4$ per pound. The supermarket ends its promotion. What does her budget constraint look like now? What combination of meat and potatoes maximizes her utility?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 15

Connie has a monthly income of $\$ 200$ that she allocates between two goods: meat and potatoes.
a. Suppose meat costs $\$ 4$ per pound and potatoes $\$ 2$ per pound. Draw her budget constraint.
b. Suppose also that her utility function is given by the equation $U(M, P)=2 M+P .$ What combination of meat and potatoes should she buy to maximize her utility? (Hint: Meat and potatoes are perfect substitutes.)
c. Connie's supermarket has a special promotion. If she buys 20 pounds of potatoes (at $\$ 2$ per pound), she gets the next 10 pounds for free. This offer applies only to the first 20 pounds she buys. All potatoes in excess of the first 20 pounds (excluding bonus potatoes are still $\$ 2$ per pound. Draw her budget constraint.
d. An outbreak of potato rot raises the price of potatoes to $\$ 4$ per pound. The supermarket ends its promotion. What does her budget constraint look like now? What combination of meat and potatoes maximizes her utility?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 16

Julio receives utility from consuming food ( $F$ ) and clothing $(C)$ as given by the utility function $U(F, C)=F C$ In addition, the price of food is $\$ 2$ per unit, the price of clothing is $\$ 10$ per unit, and Julio's weekly income is \$50.
a. What is Julio's marginal rate of substitution of food for clothing when utility is maximized? Explain.
b. Suppose instead that Julio is consuming a bundle with more food and less clothing than his utility maximizing bundle. Would his marginal rate of substitution of food for clothing be greater than or less than your answer in part a? Explain.

SM

Samuel Mister

Numerade Educator

Problem 17

The utility that Meredith receives by consuming food $F$ and clothing $C$ is given by $U(F, C)=F C .$ Suppose that Meredith's income in 1990 is $\$ 1200$ and that the prices of food and clothing are $\$ 1$ per unit for each. By 2000 however, the price of food has increased to $\$ 2$ and the price of clothing to $\$ 3 .$ Let 100 represent the cost of living index for $1990 .$ Calculate the ideal and the Laspeyres cost-of-living index for Meredith for 2000 (Hint: Meredith will spend equal amounts on food and clothing with these preferences.)

Kush Khamesra

Numerade Educator