Economics 301 – Intermediate Microeconomics
John Moran
Problem Set #2
Note: In any problem that requires you to draw a budget constraint, please be sure
to label all relevant points and slopes (e.g. all intercepts, all slopes, and any point on
the horizontal axis where the slope of the budget line changes).
Chapter 3 Questions for Review
1
Chapter 3 Problems
1, 3, 4, 5, 6, 8, 12, 16, 17, 18
Additional Problems
1 – 17 listed below
1. All points on or below a budget constraint
a) Are attainable with the given income.
b) Are equally desirable.
c) Represent bundles that exactly exhaust the income available.
d) Are described, in part, by a, b, and c above.
2. If the price of a good shown on the vertical axis of a budget graph is cut in
half and the price of the good on the horizontal axis is cut by 25%, then the
budget constraint
a) Shifts left and becomes steeper.
b) Shifts right and becomes steeper.
c) Shifts left and becomes flatter.
d) Shifts right and becomes flatter.
3. Indifference curves that intersect would be illogical constructs because
a) Of the assumption that more is preferred to less.
b) Indifference curves are an inherently illogical construct.
c) Of the transitivity assumption.
d) Of both a and c above.
e) Of none of the above.
4. The marginal rate of substitution between food and shelter at a given point on
an indifference curve
a) Is equal to the absolute value of the slope of the indifference curve at
that point.
b) Is equal to the rate at which the consumer is willing to exchange the
two goods.
c) Reflects the relative values the consumer attaches to the two goods.
d) Is described, in part, by each of the above statements.
5. If food is on the vertical axis and shelter is on the horizontal axis, a set of
indifference curves that are quite steep
a) Reflect a preference pattern that generally values shelter high relative
to food.
b) Imply that food has a higher relative value than shelter for this
consumer.
c) Say nothing about how the consumer feels about the two goods until a
budget line is introduced.
d) Mean that the two goods are perfect complements.
6. You are an avid baseball fan. You root for Baltimore over the Yankees, the
Yankees over Cleveland, and Cincinnati over the Yankees. If Cleveland and
Cincinnati play you don’t care who wins. Which of these teams would you
prefer to see in the world series?
a) Yankees.
b) Baltimore.
c) Cleveland.
d) Cincinnati.
e) Unable to tell due to intransitive preferences.
7. In order to encourage energy conservation, many public utility companies
charge consumers a higher rate on units of electricity consumed in excess of
some threshold amount. In contrast, a common marketing ploy by other firms
is to offer “quantity discounts” to consumers who purchase large quantities of
a good. To illustrate how these pricing schemes alter the typical consumer’s
budget set, suppose income = $100, PX = $2 if the consumer buys less than 40
units of X, PX = $3 if the consumer buys more than 40 units of X, and PY =
$5. Draw the budget constraint.
8. Natalie is always willing to give up 10 ounces of licorice for 1 ounce of
chocolate. Mitchell, on the other hand, will always give up 10 ounces of
chocolate for 1 ounce of licorice. Based on this information, answer the
following questions:
a) Do Natalie’s preferences exhibit a diminishing marginal rate of
substitution between chocolate and licorice? Why or why not?
b) Assuming that Natalie and Mitchell have the same amount of money
to spend on chocolate and licorice, who will purchase the most
licorice? Why?
9. Suppose an individual’s marginal rate of substitution is 3 slices of pizza for 1
beer at the present bundle of beer and pizza that she is consuming. If the price
of beer is $1.00 and the price of a slice of pizza is $1.50, is the consumer
maximizing her utility? If not, how should she change her consumption?
10. If the price of good X is $1.00, the price of good Y is $2.00, and the
consumer’s income is $36.00, find the optimal consumption bundle for a
consumer who is always willing to trade 4 units of Y for 1 unit of X.
11. If the price of good X is $1.00, the price of good Y is $2.00, and the
consumer’s income is $36.00, find the optimal consumption bundle for a
consumer who always consumes 4 units of Y for each unit of X.
12. If the price of good X is $1.00, the price of good Y is $2.00, and the
consumer’s income is $36.00, find the optimal consumption bundle for a
consumer whose marginal rate of substitution is given by
MRS 
Y
X
Note: The MRS shown above assumes that the X good is on the horizontal
axis and the Y good is on the vertical axis.
13. Illustrate graphically the case in which the provision of free public education
increases the average quality of education.
14. Illustrate graphically the case in which the provision of free public education
reduces the average quality of education.
15. Illustrate graphically a case in which the food stamp program discussed in
class increases the amount of food consumed relative to an equivalent cash
transfer.
16. Illustrate graphically a case in which the food stamp program does not
increase the amount of food consumed relative to an equivalent cash transfer.
17. In the case where the food stamp program does lead to greater food
consumption than an equivalent cash transfer, does the program make
recipients better or worse off than the cash transfer? You must provide a
diagram to support your answer.