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Consumer Behavior: Practice Problem Set

© Subhasis Bera

Consumer Behavior
Problem 1:

Suppose the utilities derived from the last unit of consumption of the commodity A, B, and C
are 10, 6, and 3, respectively. If the prices are A = $5, B = $2, and C = $1.50, which product is
economically most valuable? Explain.

Problem 2:

Assume that you have $1000 to take trips (T) and to go out to restaurants (R). Each trip costs
$160 and each visit to restaurant costs $20. If the marginal utility of travel is MUT  80  2T
and that of eating at restaurants is MU R  50  R , what should be the optimal values of T and
R?

Problem 3

Suppose Abhirup Sengupta’s Preference pattern is represented by the Constant Elasticity of


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Substitution (CES) utility function  q1  q2   . If he wants to spend all of his income Y on both
the commodities, what will be the optimal quantity demanded of q1 and q2? Derive this as a
function of their prices (p1 and p2) and income (Y).

Problem 4

In a two-commodity world Rishabh Sareen’s preferences are represented by the utility


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function U  x1 , x2    x12  x2 where (x1 , x2)represent the quantities consumed of the two goods
and α is a non-negative parameter.

Now if Rishabh Sareen’s income is M and price of x1 and x2 are p1 and p2 respectively, derive
her optimum level of purchase of x1 and x2.

Problem 5

Shashwat Trivedi receives utility from days spent traveling on vacation domestically (D) and
days spent traveling on vacation in a foreign country (F), as given by the utility function
U ( D, F )  10 DF . In addition, the price of a day spent traveling domestically is $100, the price
of a day spent traveling in a foreign country is $400, and Shashwat Trivedi’s annual travel
budget is $4,000.

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Consumer Behavior: Practice Problem Set
© Subhasis Bera

a) Suggest him a combination of vacation domestically and vacation in a foreign country that
maximizes his utility within the stipulated budget.
b) In this regard define marginal rate of substitution and find out where she prefers to travel
more.

Problem 6

Shiny Agarwal likes to talk on the telephone with Shivangi Garg and Shalini Chopra. We can
represent her preferences with the utility function U(B,C) = 10N + 5D,where N and D are
minutes of conversation per month with Shivangi Garg and Shalini Chopra respectively. What
is the formula for her indifference curve to get U units of utility? What is her marginal rate of
substitution of minutes talking to Shivangi Garg for minutes talking to Shalini Chopra?

Problems 7

Shubham Singhai considers beer and soda to be perfect substitutes at a rate of 1:2, i.e., he
always receives the same utility if he has one beer or two sodas to drink. He spends $12 a day
on drinks, and beer cost $3 while sodas cost $1 each. However, one day the price of beers
decreases to $2, there is no change in his budget.

How does consumption change when price of beers changes? What is Shubham Singhai’s new
level of utility?

Problem 8

Suppose that the utility from consuming hours of studying (denoted s ) and consuming hours
of chilling out (denoted c) can be represented by the following marginal utility functions

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mu ( s)  and mu (c) 
s c
Where mu(s) is the marginal utility gained from the last hour of studying, and similarly for
mu(c). Suppose the price of studying is 1$, and the price of chilling out is 3$. What will be the
ratio of studying to chilling out in the consumer’s equilibrium? In other words, in equilibrium,
what will the ratio of s over c be equal to?

Problem 9
Shreya Mahajan ‘s utility function is U ( x, y)  x y , with associated marginal utility functions
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MU x  2 xy and MU y  x 2 . She has income I = $240 and faces prices Px  $8 and Py  $2 .

a) Determine Shreya’s optimal basket given these prices and her income.

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Consumer Behavior: Practice Problem Set
© Subhasis Bera

Problem 10

Chetan Khaitan’s preferences over Bread (B) and Banana (N) are described by the utility
function U  B, N   min 2 B,3N  . His monthly income is 100 dollars, and he only buys these
two goods out of his income. Denote the price of Bread by PB and of banana by PN.

Problem 11

Suppose Deepanshu Chhabra always uses exactly two pats of butter on each piece of toast. If
toast costs $0.10/slice and butter costs $0.20/pat, find Deepanshu Chhabra‘s best affordable
bundle if he has $12/mo to spend on toast and butter. Suppose Deepanshu Chhabra starts to
watch his cholesterol and therefore alters his preference to using exactly one pat of butter on
each piece of toast. How much toast and butter would Deepanshu Chhabra then consume each
month?

Problem 12

Deeksha Dixit’s utility function over leisure (L) and other goods (Y) is U ( L, Y )  Y  LY . The
associated marginal utilities are MUY  1  L and MU L  Y . She purchases other goods at a
price of $1, out of the income she earns from working. Show that, no matter what Deeksha
Dixit’s wage rate, the optimal number of hours of leisure that she consumes is always the same.
What is the number of hours she would like to have for leisure?