Chapter 4: Theory On Consumer'S Behavior Part 1: Answer True or False With Short Explanation

PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749)
CHAPTER 4: THEORY ON CONSUMER’S BEHAVIOR

PART 1: ANSWER TRUE OR FALSE WITH SHORT EXPLANATION
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 each other.
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. An indifference curve which is relatively flat implies that consumers prefer good X to Y.
9. An indifference curve which is relatively steep implies that consumers prefer good Y to X.
10. Two perfect complementary goods have constant marginal rate of substitution.
11. If the utility function is U = (5X + 7Y)3 then X and Y are complementary goods.
12. If the utility function is U = (3X + 2Y)4 then X and Y are perfect substitutes.
13. If consumer's income increases, the slope of budget line will change.
14. Budget line shifts outward when price of one good changes, other things equal.
15. If price of good X changes while income and price of good Y remains unchanged, budget
line will shift parallel.
16. 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.
17. 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.
18. 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.
19. 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.
20. 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.
viethoa.k52@ftu.edu.vn
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PART 2: DISCUSSION
1. In order to support vulnerable people during COVID-19 pandemic, Vietnamese government
is considering between two following options:
(1) Subsidize the price of food so that food would be cheaper.
(2) Grand money support package which values VND 62 trillion to people so that they can
buy more goods.
Assume that in both options, people can buy the same level of more goods. Apply your
knowledge so far to discuss which option brings people higher utility?
2. In order to support students during COVID-19 pandemic, an university in Vietnam is
considering between two following options:
(1) Subsidize the tuition fee for each student so that each credit would be cheaper, total
amount of subsidy equals to VND 7 million.
(2) Grant a scholarship which worth VND 7 million for each student.
Apply your knowledge so far to discuss which option is more beneficial to the students in this
university?
3. In order to support students during COVID-19 pandemic, a high school in the USA is
considering between two following options:
(1) Offer a free course which worth $500 for each student.
(2) Subsidize $500 for each student.
Apply your knowledge so far to discuss which option is more beneficial to the students in this
school?
PART 3: CALCULATING EXERCISES
Exercise 1: An individual is spending all his income, which is 2000$, on two goods X and Y
with utility function U = X2Y2 knowing the price of good X is 10$/unit, price of good Y is
20$/unit. Calculate optimal consumption combination and Umax for this individual.
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. Calculate optimal consumption combination and Umax.
is U = 2X0,2Y0,8. Calculate optimal consumption combination and Umax.
Exercise 4: A consumer has 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. Calculate optimal consumption
combination and Umax.
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Exercise 5: A consumer has 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) Calculate optimal consumption combination and Umax.
b) If PY = 2$/unit but price of good Y remains unchanged, calculate new optimal consumption
combination and Umax in this case.
is U = X0,4Y0,6. Calculate optimal consumption combination and Umax.
is U = 2XY. Calculate optimal consumption combination and Umax
Exercise 8: A consumer with utility function U = X.Y2 decides to spend her income of 1,5
million dongs on two goods X and Y with PX = 10.000 dongs/unit, PY = 10.000 dongs/unit.
b) If I = 1,2 million dongs, calculate optimal consumption combination and Umax.
Exercise 9: A consumer with utility function U = 2X1/2 + 5Y. She decides to spend her income
of 108$ on two goods X and Y with PX = 2$/unit, PY = 10$/unit. Calculate optimal consumption
combination and Umax.
Exercise 10: A consumer has 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.
Calculate optimal consumption combination and Umax.
Exercise 11: A consumer has 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) Calculate optimal consumption combination and Umax when income = 1000$.
b) Calculate optimal consumption combination and Umax when income = 1200$.
Exercise 12: A consumer has 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.
b) If price of good X is doubled but price of good Y remains unchanged, calculate new optimal
consumption combination and Umax in this case.
Exercise 13: An individual has 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) Calculate optimal consumption combination and Umax for this individual.
b) Calculate minimum income of this individual so that she can gain U = 100.
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Exercise 14: A consumer has 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.
b) If total utility function of that consumer is U = 2X + 3Y, calculate optimal consumption
Exercise 15: A consumer has 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.
b) Assume that PX remains unchanged but PY = 70$/unit, calculate optimal consumption
Exercise 21: A consumer decides to spend her income of 200$ on X and Y with PX = 4$/unit,
PY = 2$/unit.
a) 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 20 units of Y only. The following
units are still applied the initial price (except for the bonus). Derive budget line function and
draw the budget line in this case.
b) There is another promotion from the seller: buying 20 units of Y at the initial price, consumer
will get 5 units more free of charge. This is applied for every 20 units of Y bought by consumers.
Derive budget line function and draw the budget line in this case.
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c) Assume that utility function of this consumer is U = 2X + Y. Calculate optimal consumption

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. Calculate optimal consumption combination and Umax in this case.
of 1,5 million dongs on two goods X and Y with PX = 20.000 dongs/unit, PY = 30.000
dongs/unit.
b) Assume that price of good Y is doubled while price of good X remains unchanged. Calculate
new optimal consumption combination and Umax in this case.
c) If the supplier implements a promotion campaign: buy 1 get 1 with good Y, calculate optimal
consumption combination and Umax in this case.
Exercise 24: An individual has utility function U = min{2X;3Y}. She decides to spend her
income of 260$ on two goods X and Y with PX = 2$/unit, PY = 3$/unit. Calculate optimal
consumption combination for this individual.
Exercise 25: An individual has 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. Calculate optimal
consumption combination for this individual.
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Chapter 4: Theory On Consumer'S Behavior Part 1: Answer True or False With Short Explanation

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PRINCIPLES OF MICROECONOMICS INSTRUCTOR: NGUYEN VIET HOA (0378418749)

CHAPTER 4: THEORY ON CONSUMER’S BEHAVIOR

c) Assume that utility function of this consumer is U = 2X + Y. Calculate optimal consumption

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