TOPIC NUMBER 3 ACTIVITY: INDIVIDUAL BEHAVIOR

1. Airlines give away millions of tickets each year through their frequent flyer programs, with
the typical airline awarding a free ticket for each 25,000 miles flown on the airline. The average
airline ticket costs $500 and is for a 2,500-mile round trip. Given this information, evaluate the
following statement: Airlines could have the same effect on demand by eliminating their
frequent flyer programs and simply lowering the average ticket price by 10 percent.

2. 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?

3. Over the past decade, medical costs have increased more rapidly than other prices. In order
to illustrate how rising medical costs have affected consumer alternatives, let X represent the
quantity of medical services, and let Y represent the quantity of other goods. Furthermore, let
income (M) be measured in hundreds of dollars, the price of medical services and other goods
in terms of dollars per minute, with M = 100, Px = 4, and Py = 5.
a. Graph the budget line, and determine the market rate of substitution.
b. Illustrate the budget set.
c. Show in your graph what happens to the budget constraint if P x increases to $10.
d. What is the meaning of the slope of the two budget constraints?

4. At a very basic level, food and shelter constitute the two most important goods needed to
sustain human life. Accordingly, assume that a poor person must allocate his income solely
between food and shelter.
a. Show that if shelter is an inferior good, food must be a normal good.
b. If food is a normal good, is shelter necessarily an inferior good? Explain, and show your
answer graphically.

5. If shoes and socks are complements and both are normal goods, show graphically what
would happen to the consumption of shoes and socks if:
a. the price of shoes decreased.
b. consumer incomes increased.