PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749)

CHAPTER 4: THEORY ON CONSUMER’S BEHAVIOR

PART 1: TRUE OR FALSE, EXPLAIN?
1. When marginal utility decreases, total utility will increase at an increasing rate.
2. Consumer surplus is the area of the triangle above the price line and below demand curve.
3. Indifference curves can intersect.
4. The slope of an indifference curve always decreases as the quantity consumed of good on
the horizontal axis increases.
5. In the general case, indifference curve is getting more and more flatter when the consumption
of good in the vertical axis increases.
6. When moving down along an indifference curve in the general case and sacrificing the same
amount of goods on the vertical axis, there will be an increasing amount of goods represented
on the horizontal axis.
7. Indifference curve always convex to the origin, indicates the law of diminishing marginal
utility.
8. The shape of an indifference curve in the general case usually depends on whether consumers
prefer good X to good Y or good Y to good X.
9. Two perfect complementary goods have constant marginal rate of substitution.
10. If the utility function is U = (5X + 7Y)3 then X and Y are complementary goods.
11. If the utility function is U = (3X + 2Y)4 then X and Y are perfect substitutes.
12. If consumer's income increases, the slope of budget line will change.
13. Budget line shifts outward when price of one good changes, other things equal.
14. If price of good X changes while income and price of good Y remains unchanged, budget
line will shift parallel.
15. If income and price of good X decrease by two times while price of good Y remains
unchanged then budget line will pivot outward and become flatter.
16. If income and price of good Y increase by three times while price of good X remains
unchanged then budget line will rotate inward and become steeper.
17. If MUX/MUY = 1/3 and PX/PY = 0.3 then consumer should buy more of good X and less of
good Y in order to achieve optimal consumption combination.
18. If MUX/MUY = 3/4 and PX/PY = 0.75 then consumer should buy more of good Y and less
of good X in order to achieve optimal consumption combination.
19. A consumer is willing to trade off 3 units of good X in order to get 1 unit of good Y, given
price of good Y is equal to 1/3 of the price of good X, so this consumer should buy more of
good X and less of good Y to achieve optimal consumption combination.
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PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749)

PART 2: EXERCISES
Exercise 1: A consumer has total utility function U = √𝑋 2 + 𝑌 2 . She decides to spend her
income of 2 million dongs on two goods X and Y with PX = 30.000 dongs/unit, PY = 40.000
dongs/unit.
a) Determine optimal consumption combination and calculate Umax.
b) Determine new optimal consumption combination so that this consumer can gain U = 100.
Calculate minimum expenditure of consumer in this case.
Exercise 2: A consumer decides to spend her income of 3 million dongs on two goods X and
Y with PX = 20.000 dongs/unit, PY = 50.000 dongs/unit. Total utility function of this consumer
is U = 2X0,3Y0,6. Determine optimal consumption combination and calculate Umax.
Exercise 3: A consumer decides to spend her income of 3 million dongs on two goods X and
Y with PX = 20.000 dongs/unit, PY = 50.000 dongs/unit. Total utility function of this consumer
is U = 2X0,2Y0,8. Determine optimal consumption combination and calculate Umax.
Exercise 4: A consumer has total utility function U = √XY. She decides to spend her income of
60$ on two goods X and Y with PX = 3$/unit, PY = 1$/unit. Determine optimal consumption
combination and calculate Umax.
Exercise 5: A consumer has total utility function U = XY. She decides to spend her income of
120$ on two goods X and Y with PX = 3$/unit and PY = 4$/unit.
a) Determine optimal consumption combination and calculate Umax.
b) If PY = 2$/unit but price of good Y remains unchanged, determine new optimal consumption
combination and calculate Umax in this case.
Exercise 6: A consumer decides to spend her income of 2 million dongs on two goods X and
Y with PX = 10.000 dongs/unit, PY = 15.000 dongs/unit. Total utility function of this consumer
is U = X0,4Y0,6. Determine optimal consumption combination and calculate Umax.
Exercise 7: A consumer decides to spend her income of 2 million dongs on two goods X and
Y with PX = 10.000 dongs/unit, PY = 15.000 dongs/unit. Total utility function of this consumer
is U = 2XY. Determine optimal consumption combination and calculate Umax
Exercise 8: A consumer with total utility function U = X.Y2 decides to spend her income of 1,5
million dongs on two goods X and Y with PX = 10.000 dongs/unit, PY = 10.000 dongs/unit.
a) Determine optimal consumption combination and calculate Umax.
b) If I = 1,2 million dongs, determine optimal consumption combination and calculate Umax.
Exercise 9: A consumer with total utility function U = 2X1/2 + 5Y. She decides to spend her
income of 108$ on two goods X and Y with PX = 2$/unit, PY = 10$/unit. Determine optimal
consumption combination and calculate Umax.
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PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749)

Exercise 10: A consumer has total utility function U = (X-2)Y. She decides to spend her income
of 1 million dongs on two goods X and Y with PX = 20.000 dongs/unit, PY = 5.000 dongs/unit.
Determine optimal consumption combination and calculate Umax.
Exercise 11: A consumer has total utility function U = (Y-1)X. She decides to spend her income
on two goods X and Y with PX = 10$/unit, PY = 10$/unit.
a) Determine optimal consumption combination and calculate Umax when income = 1000$.
b) Determine optimal consumption combination and calculate Umax when income = 1200$.
Exercise 12: A consumer has total utility function U = (4X-8)Y. She decides to spend her
income of 30$ on two goods X and Y with PX = 3$/unit and PY = 6$/unit.
a) Determine optimal consumption combination and calculate Umax.
b) If price of good X is doubled but price of good Y remains unchanged, determine new optimal
consumption combination and calculate Umax in this case.
Exercise 13: A consumer has total utility function U = 4XY. She decides to spend her income
of 900.000 dongs on two goods X and Y with PX = 10.000 dongs/unit, PY = 15.000 dongs/unit.
a) Determine optimal consumption combination and calculate Umax.
b) If total utility function of that consumer is U = 2X + 3Y, determine optimal consumption
combination and calculate Umax in this case.
Exercise 14: A consumer has total utility function U = 2X + 9Y. She decides to spend her
income of 1800$ on two goods X and Y with PX = 20$/unit, PY = 90$/unit.
a) Determine optimal consumption combination and calculate Umax.
b) Assume that PX remains unchanged but PY = 70$/unit, determine optimal consumption
combination and calculate Umax in this case.
Exercise 15: A consumer has total utility function U = 3X + 4Y. She decides to spend her
income of 2 million dongs on two goods X and Y with PX = 50.000 dongs/unit, PY = 40.000
dongs/unit. Determine optimal consumption combination and calculate Umax.
Exercise 16: A consumer has total utility function U = 3X + 6Y. She decides to spend her
income of 2 million dongs on two goods X and Y with PX = 50.000 dongs/unit, PY = 80.000
dongs/unit. Determine optimal consumption combination and calculate Umax.
Exercise 17: A consumer has total utility function U = 4X + 6Y. She decides to spend her
income of 2 million dongs on two goods X and Y with PX = 40.000 dongs/unit, PY = 50.000
dongs/unit. Determine optimal consumption combination and calculate Umax.
Exercise 18: A consumer has total utility function U = 2X + 3Y. She decides to spend her
income of 2 million dongs on two goods X and Y with PX = 40.000 dongs/unit, PY = 50.000
dongs/unit. Determine optimal consumption combination and calculate Umax.
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PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749)

Exercise 19: A consumer has total utility function U = 4X + 3Y. She decides to spend her
income of 2 million dongs on two goods X and Y with PX = 50.000 dongs/unit, PY = 40.000
dongs/unit. Determine optimal consumption combination and calculate Umax.
Exercise 20: A consumer decides to spend her income of 200$ on X and Y with PX = 4$/unit,
PY = 2$/unit.
a) Derive budget line function and draw the budget line.
b) There is a promotion from the seller: buying 20 units of Y at the initial price, consumer will
get 10 units more free of charge. This is applied on the first 30 units of Y only. The following
units are still applied the price of 20.000 dongs (except the bonus). Derive budget line function
and draw new budget line.
c) Assume that total utility function of this consumer is U = 2X + Y. Determine optimal
consumption combination and calculate Umax.
Exercise 21: A consumer has total utility function U = 3X + 5Y. She decides to spend her
income of 3 million dongs on two goods X and Y with PX = 30.000 dongs/unit, PY = 50.000
dongs/unit.
a) Determine optimal consumption combination and calculate Umax.
b) Assume that the supplier implements a promotion campaign as follow: if consumers buy
more than 30 units of good X at the initial price, consumers will receive a 20% discount for the
remaining units they buy. Determine optimal consumption combination and calculate Umax in
this case.
Exercise 22: A consumer has total utility function U = 2X + 3Y. She decides to spend her
income of 1,5 million dongs on two goods X and Y with PX = 20.000 dongs/unit, PY = 30.000
dongs/unit.
a) Determine optimal consumption combination and calculate Umax.
b) Assume that price of good Y is doubled while price of good X remains unchanged. Determine
new optimal consumption combination and calculate Umax in this case.
c) If the supplier implements a promotion campaign: buy 1 get 1 with good Y, determine
optimal consumption combination and calculate Umax in this case.
Exercise 23: A consumer has total utility function U = min{3X;5Y}. She decides to spend her
income of 900$ on two goods X and Y with PX = 30$/unit, PY = 50$/unit. Determine optimal
consumption combination and calculate Umax for this consumer.
Exercise 24: A consumer has total utility function U = min{5X;7Y}. She decides to spend her
income of 740$ on two goods X and Y with PX = 5$/unit, PY = 7$/unit. Determine optimal
consumption combination for this consumer.
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PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749)

PART 3: MULTIPLE CHOICE QUESTIONS

1. The theory of consumer behavior assumes that
A. consumers behave rationally, maximizing their satisfactions.
B. consumers have unlimited money incomes.
C. consumers do not know how much marginal utility they obtain from succesive units of
various products.
D. marginal utility is constant.
2. Marginal utility is the
A. sensitivity of consumer purchases of a good to changes in the price of that good.
B. change in total utility realized by consuming one more unit of a good.
C. change in total utility realized by consuming another unit of a good divided by the
change in the price of that good.
D. total utility associated with the consumption of a certain number of units of a good
divided by the number of units consumed.
3. Marginal utility
A. is equal to total utility divided by the number of units consumed.
B. is equal to total utility if the demand curve is linear.
C. increases as more of a product is consumed.
D. diminishes as more of a product is consumed.
4. If total utility is increasing, marginal utility
A. may be decreasing, but still positive.
B. must also be increasing.
C. may be either positive or negative.
D. will be increasing at an increasing rate.
5. Where total utility is at a maximum, marginal utility is
A. negative.
B. positive and increasing.
C. zero.
D. positive but decreasing.
6. When a consumer shifts purchases from good X to good Y, the marginal utility of
A. X falls and the marginal utility of Y rises.
B. X rises and the marginal utility of Y falls.
C. both X and Y rises.
D. both X and Y falls.
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7. Which of the following statements is correct?

A. If marginal utility is diminishing, total utility must also be diminishing.
B. There is no relationship between how rapidly marginal utility declines and the price
elasticity of demand.
C. If an individual's marginal utility from a product diminishes rapidly, her demand for this
product is inelastic with respect to price.
D. If an individual's marginal utility from a product diminishes rapidly, her demand for this
product is elastic with respect to price.
8. An increase in the price of product A will
A. increase the marginal utility per dollar spent on A.
B. decrease the marginal utility per dollar spent on A.
C. not affect the marginal utility per dollar spent on A.
D. cause utility-maximizing consumers to buy more of A.
9. An indifference curve shows combinations of two goods that
A. would provide the consumer with the same level of satisfaction.
B. could be available to the consumer in a given time period.
C. could provide the consumer with similar levels of satisfaction.
D. a consumer could buy with their given income.
10. Which of the following statements is NOT TRUE of indifference curves?
A. They are convex to the origin.
B. They exhibit higher levels of utility as you move from the origin.
C. They are downward sloping.
D. They could intersect.
11. The slope of any point on an indifferent curve is known as
A. The trade-off rate
B. The marginal rate of substitution
C. The marginal rate of trade-off
D. The marginal rate of indifferent
12. The indifferent curve of the two-perfect complementary goods is
A. L-shaped C. Concave
B. Linear D. Convex
13. When the price of a good changes, ceteris paribus, the budged line will
A. Rotate
B. Rotate and shift
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PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749)

C. Shift outward, parallel to the previous one

D. Shift inward, parallel to the previous one
14. Suppose you have a limited money income and you are purchasing products A and B
whose prices happen to be the same. To maximize your utility you should purchase A and
B in such amounts that
A. their marginal utilities are the same.
B. their total utilities are the same.
C. their marginal and total utilities are proportionate.
D. the income and substitution effects associated with each are equal.
15. To maximize utility a consumer should allocate money income so that the
A. elasticity of demand on all products purchased is the same.
B. marginal utility obtained from the last dollar spent on each product is the same.
C. total utility derived from each product consumed is the same.
D. marginal utility of the last unit of each product consumed is the same.
16. In introducing the opportunity cost of time into the theory of consumer behavior we
find that, all else equal
A. one should consume less of time-intensive goods.
B. one should consume more of time-intensive goods.
C. the consumer's equilibrium position is not altered.
D. the marginal utility derived from each product must be multiplied by consumption time
in determining equilibrium.
17. A consumer with a given income will maximize their utility when
A. the marginal utilities derived from each good consumed are proportional to their prices.
B. the marginal utility derived from each commodity is equal.
C. the marginal utility derived from each product consumed is zero.
D. the total utility derived from each commodity consumed is equal.
18. A consumer is maximizing her utility with a particular money income when
A. the total utility derived from each product consumed is the same.
B. MUa/Pa = MUb/Pb = MUc/Pc = ... = MUn/Pn.
C. MUa = MUb = MUc = ... = MUn.
D. Pa = Pb = Pc = ... = Pn.
19. If the price of good X rises, then the resulting decline in the amount purchased will
A. necessarily increase the consumer's total utility from his total purchases.
B. increase the marginal utility of this good.
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C. increase the total utility from purchases of this good.

D. reduce the marginal utility of a dollar spent on this good.
20. Suppose that MUx/Px exceeds MUy/Py. To maximize utility the consumer who is
spending all her money income should buy
A. less of X only if its price rises.
B. more of Y only if its price rises.
C. more of Y and less of X.
D. more of X and less of Y.
21. Ben is exhausting his money income consuming products A and B in such quantities
that MUA/PA = 5 and MUB/PB = 8. Ben should purchase
A. more of A and less of B.
B. more of B and less of A.
C. more of both A and B.
D. less of both A and B.
22. The marginal utility of the last unit of A consumed is 12 and the marginal utility of the
last unit of B consumed is 8. What set of prices for A and B respectively would be
consistent with consumer equilibrium?
A. $4 and $6 C. $8 and $12
B. $6 and $4 D. $16 and $9
23. Suppose that Elizabeth is currently exhausting her money income by purchasing 10
units of A and 8 units of B at prices of $2 and $4 respectively. The marginal utility of the
last units of A and B are 16 and 24 respectively. These data suggest that Elizabeth
A. has preferences that are at odds with the principle of diminishing marginal utility.
B. considers A and B to be complementary goods.
C. should buy less A and more B.
D. should buy less B and more A.
24. Assume you are spending your full budget and purchasing such amounts of X and Y
that the marginal utility from the last units consumed is 40 and 20 utils respectively.
Assume the prices of X and Y are $8 and $4 respectively, you
A. should substitute X for Y until the marginal utility per hour is the same for both
products.
B. are consuming X and Y in the optimal amounts.
C. should consume less of Y and more of X.
D. should consume less of X and more of Y.
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