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EXERCISE 7 (Indifference Curve Approach)

This document provides an exercise on consumer choice theory using indifference curves. It involves: 1) Drawing three budget lines based on the consumer's initial income and prices of food and clothing, a doubling of the food price, and a 20% reduction in income. 2) Identifying the indifference curve that provides the highest level of satisfaction. 3) Determining if a consumer can purchase a specific quantity of goods based on their budget line. 4) Identifying the preferred bundle of goods from three options based on maximizing utility. 5) Calculating the consumer's total expenditure for an optimal bundle of goods given prices.

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Irene Pacunayen
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147 views

EXERCISE 7 (Indifference Curve Approach)

This document provides an exercise on consumer choice theory using indifference curves. It involves: 1) Drawing three budget lines based on the consumer's initial income and prices of food and clothing, a doubling of the food price, and a 20% reduction in income. 2) Identifying the indifference curve that provides the highest level of satisfaction. 3) Determining if a consumer can purchase a specific quantity of goods based on their budget line. 4) Identifying the preferred bundle of goods from three options based on maximizing utility. 5) Calculating the consumer's total expenditure for an optimal bundle of goods given prices.

Uploaded by

Irene Pacunayen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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MICROECONOMIC THEORY

EXERCISE NO. 7
Theory of Consumer Choice : Indifference curve approach

1. A consumer has an income of Php 3,000.00 per period. He spends it on food and clothing, with
prices at Php 150.00 per unit and Php100.00 per unit, respectively.

a. Draw the consumer’s budget line, placing food on the Y axis and clothing on the X axis.
Label it as BL1.
b. Suppose the price of food doubles, show what happens to the budget line. Using the same
graph in letter a, sketch the new budget line and label it as BL 2.
c. Starting from the initial income and price levels, suppose the consumer’s income falls by
20%, draw the new budget line in the same graph used in a and b and label it as BL 3.

a. Which indifference curve gives the highest level of satisfaction ?


A. U1 B. U2 C. U3? Why?
b. Can the consumer purchase 100 units of product X and 80 units of product Y? Why or why
not?
c. Should the consumer buy or consume combination B? Why or why not?
d. Among combinations A, D and C, which is the preferred combination of
goods X and Y? Explain your answer.
e. What is the optimal combination of X and Y?
f. How much will be the consumer’s total expenditure on food and clothing if he buys the
combination in letter e. Prices of products X and Y are Php50.00 and Php 100.00 each
respectively.

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