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CONSUMER THEORY QUESTIONs

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Gen Abulkhair
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20 views2 pages

CONSUMER THEORY QUESTIONs

Uploaded by

Gen Abulkhair
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CONSUMER BEHAVIOUR

DISCUSSION QUESTIONS
QUESTION 1
A consumer has $300 to spend on goods X and Y. The market prices of these
two goods are Px = $15 and Py = $5.
a. What is the market rate of substitution between goods X and Y?
b. Illustrate the consumer’s opportunity set in a carefully labeled diagram.
c. Show how the consumer’s opportunity set changes if income increases
by $300. How does the $300 increase in income alter the market rate of
substitution between goods X and Y?

QUESTION 2
Aconsumer must divide $600 between the consumption of product X and
product Y. The relevant market prices are Px = $10 and Py = $40.
a. Write the equation for the consumer’s budget line.
b. Illustrate the consumer’s opportunity set in a carefully labeled diagram.
c. Show how the consumer’s opportunity set changes when the price of good
X increases in $20. How does this change alter the market rate of substitution
between goods X and Y?

QUESTION 3
A consumer must spend all of her income on two goods (X and Y). In each of
the following scenarios, indicate whether the equilibrium consumption of
goods X and Y will increase or decrease. Assume good X is an normal good
and good Y is a inferior good.
a. Income doubles.
b. Income quadruples and all prices double.
c. Income and all prices quadruple.
d. Income is halved and all prices double

QUESTION 4

A consumer’s budget set for two goods (X and Y) is 600 ≥ 3X + 6Y.


a. Illustrate the budget set in a diagram.
b. Does the budget set change if the prices of both goods double and the
consumer’s income also doubles? Explain.
c. Given the equation for the budget set, can you determine the prices of the
two goods? The consumer’s income? Explain.

QUESTION 5

It is common for supermarkets to carry both generic (store-label) and brand name (producer-label) varieties of
sugar and other products. Many consumers view these products as perfect substitutes, meaning that consumers
are always willing to substitute a constant proportion of the store brand for the producer brand. Consider a
consumer who is always willing to substitute four pounds of a generic store-brand sugar for two pounds of a
brand-name sugar. Do these preferences exhibit a diminishing marginal rate of substitution between store-
brand and producer-brand sugar? Assume that this consumer has $24 of income to spend on sugar, and the
price of store-brand sugar is $1 per pound and the price of producer-brand sugar is $3 per pound. How much of
each type of sugar will be purchased? How would your answer change if the price of store-brand sugar
was $2 per pound and the price of producer-brand sugar was $3 per pound?

QUESTION 6

Consider an employee who does not receive employer-based health insurance and must divide her $1,000 per
week in after-tax income between health insurance and “other goods.” Draw this worker’s opportunity set if
the price of health insurance is $200 per week and the price of “other goods” is $100 per week. On the same
graph, illustrate how the opportunity set would change if the employer agreed to give this employee $200
worth of health insurance per week (under current tax laws, this form of compensation is nontaxable). Would
this employee be better or worse off if, instead of the health insurance, the employer gave her a $200 per week
raise that was taxable at a rate of 25 percent? Explain

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