The theory of consumer behavior

Write the definitions

marginal utility
law of diminishing of marginal utility (the first law of Gssen)
utility maximizing rule (the second law of Gssen)
indifference curve
marginal rate of substitution, MRS
budget line
consumer euilibrium
!"ncome#consum$tion% curve
&ngel curve
!'rice#consum$tion% curve
TRUE-FALSE QUESTIOS

() *tility is the level of satisfaction that a $erson gets from consuming a good)
+) ,hen total utility is at maximum, marginal utility is also maximized)
-) .s consum$tion of a good or service increase, the marginal utility decreases)
/) . decrease in the $rice of one good results in a $arallel shift in the budget line)
0) .ny $oint on a lower indifference curve is $referred to any $oint on a higher one)
1) .ll $oints on an indifference curve re$resent combinations of two goods that are eually
desirable to the consumer)
2) .n increase in income shifts indifference curves outward)
3) 4he marginal rate of substitution re$resents the maximum amount of one commodity a
consumer is willing to give u$ in exchange for one more unit of another commodity)
5) . change in the $rice of a good will shift the indifference curves)
(6) . budget line is a straight line designed to show $references for goods and services)

Multiple choice questions
1. The theory of consumer choice is based on the hypothesis that each consumer wants to
a) maximize his7 her total utility)
b) maximize his7 her marginal utility)
c) minimize the rate at which his7 her marginal utility diminishes)
d) maximize his7her real income)
+) Total utility
a) diminishes as the uantity consumed of a good increases)
b) increases as long as more goods are acuired)
c) increases as long as marginal utility is $ositive)
d) diminishes as consum$tion of some good rises)
/) The law of diminishing marginal utility explains why
a) most individual demand curves are straight lines)
b) the consumer8s euilibrium is at the tangency of an indifference curve and the budget line)
c) most individual demand curves slo$e downward)
d) marginal utility falls when total utility falls)
) 0. If total utility declines as an additional unit of a commodity is purchased,
a) marginal utility must be rising)
b) marginal utility is negative)
c) marginal utility is $ositive but falling)
d) marginal utility is zero)
)
1)The consumer maximizes his total utility (measured in money terms when, the marginal
utility
a) euals zero)
b) divided by $rice euals zero)
c) euals $rice)
d) euals total utility)
2)The slope of an indifference cur!e is called the"
a) bliss gradient9
b) ha$$iness slo$e9
c) average transformation rate9
d) marginal rate of substitution)
#.If the consumer income and the prices of goods $ and % doubles, the budget line"
a) shifts to the right9
b) shifts to the left9
c) remains unchanged9
d) no correct answe)
&.'hich of the following is characteristic of indifference cur!es(
a) they are negatively slo$ed9
b) they never intersect9
c) they are convex toward the origin9
d) all of the above are correct)
1).*n increase in income, holding prices constant, can be represented as"
a) a change in the slo$e of the budget line9
b) a $arallel outward shift in the budget line9
c) an outward shift in the budget line with its slo$e becoming flatter9
d) a $arallel inward shift in the budget line)
11.*n indi!idual consumes only two goods, $ and %. 'hich of the following
expressions represents the utility maximizing mar+et bas+et(
a) MRSxy is at a maximum9
b) 'x7'y : money income9
c) MRSxy : money income9
d) MRSxy : 'x7'y)

,-./01M2
1. 3alculate the total and marginal utility of the good and plot the respecti!e cur!es. 'hat
trends do you obser!e(
;onsumed <uantity
(<x)
4otal *tility
(4*x)
Marginal *tility
(M*x)
( +0 #
+
-
/
0
1
2
3
#
#
3+
56
#
#
06
++
+6
#
#
6
#(6
#
4. =et8s assume that a student can s$end 26 lei on $izza and >anta) 4he $rice of one $izza is +6
lei, and the $rice of a bottle of >anta ? (6 lei)
;onsumed <uantity
(<x)
Marginal *tility of
'izza (M*x)
Marginal *tility of
>anta (M*y)
(
+
-
/
0
1
2
(6
3
2
0
/
-
(
1
0
/
-
+
(
6
@ased on data $resented in the tableA
() Betermine the o$timal consum$tion $rogram of the student)
+) Betermine the total utility of the given consum$tion $rogram)
-) Cow the increase of students8 income with 36 lei will influence the consum$tion $rogramD
5) ;onsider Mary8s utility functionA 4* : /E
6)0
F
6)0
, where E and F are two goods) 4he
current $rices of E and F are G +0 and G 06, res$ectively) Mary currently has an income
of G 206 $er time $eriod)
a) ;alculate the o$timal uantities of E and F that Mary should choose, given her budget
constraint) Gra$h your answer)
b) Su$$ose that the government rations $urchases of good E such that Mary is limited to (6
units of E $er time $eriod) .ssuming that Mary chooses to s$end her entire income, how much
F will Mary consumeD
/) 4he utility that 'aula receives by consuming good E and good F is given by utility
function 4*(E,F) : 1 EF) 4he current $rices of E and F are G / and G +, res$ectively,
and 'aula currently has an income of G 36 $er time $eriod)
a) Gra$h the budget line she faces)
b) ,hat is the marginal rate of substitution of good E for good F when utility is maximizedD
c) ,hat is the utility#maximizing choice of good E and good FD
0) 'references of a consumer can be ex$ressed by the following utility functionA
4* (E,F) : (E H()(FH0))
Su$$ose that the consumer8s income is (666 m)u) 4he current $rices of E and F are (66m)u)
and +6 m)u), res$ectively)
a) Gra$h the budget line of a consumer) (0 $oints)
b) ,hat is utility#maximizing choice of a consumerD (0 $oints)
c) ,hat is the marginal rate of substitution of good E for good F when utility is maximizedD (0 $oints)
1) .n individual consumes $roducts E and F and s$ends G+/ $er time $eriod) 4he $rices of the
two goods are G0 $er unit for E and G+ $er unit for F) 4he consumer in this case has a utility
function ex$ressed asA *(E,F) : 6,0 EF
a) &x$ress the budget euation mathematically and draw the budget line) (0 $oints)
b) Betermine the values of E and F that will maximize utility in the consum$tion of E and F)
(0 $oints)
c) Betermine the total utility that will be generated $er unit of time for this individual) (0 $oints)