Microeconomics: Principles and Applications

Robert E. Hall, Marc Liberman

Chapter 6

Consumer Choice - all with Video Answers

Educators

Chapter Questions

Problem 1

Parvez, a pharmacology student, has allocated
$\$ 120$ per month to spend on paperback novels and hamburgers at his favorite burger joint. Novels cost $\$ 8$ each; hamburgers cost $\$ 6$ each. Draw his budget line.
a. Draw and label a second budget line that shows what happens when the price of a hamburger rises to $\$ 10 .$
b. Draw and label a third budget line that shows what happens when the price of a hamburger rises
to $\$ 10$ and Parvez's income rises to $\$ 240 .$

Omkar Katta

Omkar Katta

Numerade Educator

Problem 2

[Uses the Marginal Utility Approach] Now go back to the original assumptions of problem 1 (novels cost $\$ 8,$ hamburgers cost $\$ 6,$ and income is $\$ 120$ ). Suppose that Parvez is spending $\$ 120$ monthly on paperback novels and hamburgers. For novels, $M U / P=5 ;$ for hamburgers, $M U / P=4$ Is he maximizing his utility? If not, should he consume (1) more novels and fewer hamburgers; or (2) more hamburgers and fewer novels? Explain briefly.

Manasvee Singh

Numerade Educator

Problem 3

[Uses the Marginal Utility Approach] Anita consumes both pizza and Pepsi. The following tables show the amount of utility she obtains from different amounts of these two goods per week:
Suppose Pepsi costs $\$ 1$ per can, pizza costs $\$ 2$ per slice, and Anita has $\$ 18$ to spend on these two goods each week. What combination of pizza and Pepsi will maximize her utility?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 4

Three people have the following individual demand schedules for Count Chocula cereal that show how many boxes each would purchase monthly at different prices:$$\begin{array}{cccc}
\text { Price } & \text { Person 1 } & \text { Person 2 } & \text { Person 3 } \\
\hline \$ 5.00 & 0 & 1 & 2 \\
\$ 4.50 & 0 & 2 & 3 \\
\$ 4.00 & 0 & 3 & 4 \\
\$ 3.50 & 1 & 3 & 5
\end{array}$$
a. What is the market demand schedule for this cereal? (Assume that these three people are the only buyers.) Draw the market demand curve.
b. Why might the three people have different demand schedules?

Omkar Katta

Numerade Educator

Problem 5

Suppose that 1,000 people in a market each have the same monthly demand curve for bottled water, given by the equation $Q^{\mathrm{D}}=100-25 P,$ where $P$ is the price for a 12 -ounce bottle in dollars.
a. How many bottles would be demanded in the entire market if the price is $\$ 1 ?$
b. How many bottles would be demanded in the entire market if the price is $\$ 2 ?$
c. Provide an equation for the market demand curve, showing how the market quantity demanded by all
1,000 consumers depends on the price.

Omkar Katta

Numerade Educator

Problem 6

What would happen to the market demand curve for polyester suits, an inferior good, if consumers' incomes rose?

Omkar Katta

Numerade Educator

Problem 7

Larsen E. Pulp, head of Pulp Fiction Publishing Company, just got some bad news: The price of paper, the company's most important input, has increased.
a. On a supply/demand diagram, show what will happen to the price of Pulp's output (novels).
b. Explain the resulting substitution and income effects for a typical Pulp customer. For each effect, will the customer's quantity demanded increase
or decrease? Be sure to state any assumptions you are making.

Hrithvik Gadhiya

Hrithvik Gadhiya

Numerade Educator

Problem 8

"If a good is inferior, a rise in its price will cause people to buy more of it, thus violating the law of demand." True or false? Explain.

Omkar Katta

Numerade Educator

Problem 9

Which of the following descriptions of consumer behavior violates the assumption of rational preferences? Explain briefly.
a. Joseph is confused: He doesn't know whether he'd prefer to take a job now or go to college full-time.
b. Brenda likes mustard on her pasta, in spite of the fact that pasta is not meant to be eaten with mustard.
c. Brewster says, "I'd rather see an action movie than a romantic comedy, and I'd rather see a romantic comedy than a foreign film. But given the choice, I think I'd rather see a foreign film than an action movie."

Omkar Katta

Numerade Educator

Problem 10

[Uses the Indifference Curve Approach $]$ Howard spends all of his income on magazines and novels. Illustrate each of the following situations on a graph, with the quantity of magazines on the vertical axis and the quantity of novels on the horizontal axis. Use two budget lines and two indifference curves on each graph.
a. When the price of magazines rises, Howard buys fewer magazines and more novels.
b. When Howard's income rises, he buys more magazines and more novels.
c. When Howard's income rises, he buys more magazines but fewer novels.

Rashmi Sinha

Numerade Educator

Problem 11

[Uses the Marginal Utility Approach] In Figure 5 we assumed that after Max's income rose, his marginal utility values for any given number of movies or concerts remained the same as before. But now suppose that when Max's income rises, and he can consume more movies and concerts, an additional movie bas less value to Max than before. In particular, assume that Max's marginal utility values are as in the table below. Fill in the blanks for the missing values, and find Max's utility maximizing combination of concerts and movies. In Figure 5 in the chapter, locate the new combination as a point on the $\$ 200$ budget line. (It will not be one of the labeled points.) With these new marginal utility values, is one of the two goods inferior? Explain.

Nick Johnson

Numerade Educator

Problem 12

[Uses the Marginal Utility Approach] In Figure 5 we assumed that after Max's income rose, his marginal utility values for any given number of movies or concerts remained the same as before. But now suppose that when Max's income rises, having the ability to enjoy more concerts or movies makes the last movie and the last concert less valuable to him, so all the marginal utility numbers shrink. In particular, assume that Max's marginal utility values are as in the following table. Fill in the blanks for the missing values, and find Max's utility-maximizing combination of concerts and movies. In Figure 5 in the chapter, locate the new combination as a point on the $\$ 200$ budget line. (It will not be one of the labeled points.) With these new marginal utility values, is one of the two goods inferior? Explain.

Nick Johnson

Numerade Educator

Problem 13

[Uses the Indifference Curve Approach]
a. Draw a budget line for Cameron, who has a monthly income of $\$ 100 .$ Assume that he buys steak and potatoes, and that steak costs $\$ 10$ per pound and potatoes cost $\$ 2$ per pound. Add an indifference curve for Cameron that is tangent to his budget line at the combination of 5 pounds of steak and 25 pounds of potatoes.
b. Draw a new budget line for Cameron, if his monthly income falls to $\$ 80 .$ Assume that potatoes are an inferior good to Cameron. Draw a new indifference curve tangent to his
new budget constraint that reflects this inferiority. What will happen to Cameron's potato consumption? What will happen to his steak consumption?

Rashmi Sinha

Numerade Educator

Problem 14

[Uses the Indifference Curve Approach]
a. Draw a budget line for Rafaella, who has a weekly income of $\$ 30 .$ Assume that she buys chicken and eggs, and that chicken costs $\$ 5$ per pound while eggs cost $\$ 1$ each. Add an indifference curve for Rafaella that is tangent to her budget line at the combination of 4 pounds of chicken and 10 eggs. 1
b. Draw a new budget line for Rafaella, if the price of chicken falls to $\$ 3$ per pound. Assume that $\mathrm{Ra}$ faella views chicken and eggs as substitutes. What will happen to her chicken consumption? What will happen to her egg consumption?

Rashmi Sinha

Numerade Educator

Problem 15

[Uses the Indifference Curve Approach]
a. Draw a budget line for Lynne, who has a weekly income of $\$ 225 .$ Assume that she buys food and clothes, and that food costs $\$ 15$ per bag while clothes cost $\$ 25$ per item. Add an indifference curve for Lynne that is tangent to her budget line at the combination of 3 items of clothing and 10 bags of food.
b. Draw a new indifference curve diagram for Lynne, showing what will happen if her tastes change, so that she gets more satisfaction from an extra item of clothing, and less satisfaction from an extra bag of food.
c. Draw a new indifference curve diagram for Lynne, showing what will happen if she decides
to join a nudist colony.

Rashmi Sinha

Numerade Educator

Problem 16

The Smiths are a low-income family with $\$ 10,000$ available annually to spend on food and shelter. Food costs $\$ 2$ per unit, and shelter costs $\$ 1$ per square foot per year. The Smiths are currently dividing the $\$ 10,000$ equally between food and shelter. Use either the Marginal Utility Approach or Indifference Curve Approach.
a. Draw their budget constraint on a diagram with food on the vertical axis and shelter on the horizontal axis. Label their current consumption choice. How much do they spend on food? On shelter?
b. Suppose the price of shelter rises to $\$ 2$ per square foot. Draw the new budget line. Can the Smiths continue to consume the same amounts of food and shelter as previously?
c. In response to the increased price of shelter, the government makes available a special income supplement. The Smiths receive a cash grant of $\$ 5,000$ that must be spent on food and shelter. Draw their new budget line and compare it to the line you derived in part $a$. Could the Smiths consume the same combination of food and shelter as in part $a$ ?
d. With the cash grant and with shelter priced at $\$ 2$ per square foot, will the family consume the same combination as in part $a$ ? Why or why not?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 17

When an economy is experiencing inflation, the prices of most goods and services are rising but at different rates. Imagine a simpler inflationary situation in which all prices, and all wages and incomes, are rising at the same rate, say 5 percent per year. What would happen to consumer choices in such a situation? (Hint: Think about the budget line.)

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 18

[Uses the Indifference Curve Approach] With the quantity of popcorn on the vertical axis and the quantity of ice cream on the horizontal axis, draw indifference maps to illustrate each of the following situations. (Hint: Each will look different from the indifference maps in the appendix, because each violates one of the assumptions we made there.)
a. Larry's marginal rate of substitution between ice cream and popcorn remains constant, no matter how much of each good he consumes.
b. Heather loves ice cream but hates popcorn.

Rashmi Sinha

Numerade Educator

Problem 19

[Uses the Indifference Curve Approach] The appendix to this chapter states that when a consumer is buying the optimal combination of two goods $x$ and $y,$ then $M R S_{y, x}=P_{x} / P_{y} .$ Draw a graph, with an indifference curve and a budget line, and with the quantity of $y$ on the vertical axis, to illustrate the case where the consumer is buying a non-optimal combination on his budget line for which $M R S_{y, x}>P_{x} / P_{y}$.

Rashmi Sinha

Numerade Educator