ECON2021 Microeconomics 2023-24

Questions for Seminar 1:

Budget constraint and Preferences

Multiple choice questions: There may be more than one correct answer:

1. Anna’s budget is such that she can afford either 4 units of good 𝑥 and 6 units of good
𝑦 or 12 units of 𝑥 and 2 units of 𝑦 if she spends her entire budget. The price of good 𝑥
is 𝑝𝑥 and the price of good 𝑦 is 𝑝𝑦 . What of the following is true?
a) She can afford 16 units of good 𝑦
b) She can’t afford more than 14 units of good 𝑥
c) A unit of good 𝑦 is twice more expensive than a unit of good 𝑥
d) All of the above

2. Suppose Mr. Smith only eats bread and drinks only milk. He has £30 per week to
spend on his groceries. The price of 1 litre of milk is £1. It is known that if Mr. Smith
buys 5 litres of milk, then the maximum number of loaves of bread he can afford is
less than 5. However, if he buys 9 litres of milk, then he can afford at least 3 loaves of
bread. What can we infer about the price of 1 loaf of bread?
a) It is higher than 7
b) It can be any price between 4 and 6
c) It is higher than 4
d) It must be below 6
e) None of the above

3. Harold lives on Doritos and seafood salads. The price of Doritos is 1 dollar per bag
and the price of seafood salads is 2 dollars each. Harold allows himself to spend no
more than 11 dollars a day on food. He also restricts his consumption to 6,500
calories per day. There are 1,500 calories in a bag of Doritos and 500 calories in a
seafood salad. If he spends his entire money budget each day and consumes no more
calories than his calorie limit, he can consume up to:
a) 3 bags of Doritos per day but no more
b) 1 bag of Doritos per day but no more
c) 4 seafood salad per day but no more
d) 4 bags of Doritos per day but no more
e) None of the above

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4. Kathy has rational preferences, and she always prefers more of a good to less. Her
budget line is given by 2𝑥1 + 4𝑥2 = 100. The following can be said about (𝑥1 , 𝑥2 ).
a) She can buy (10, 20), but she will choose (12, 18).
b) She cannot afford (8, 22).
c) She can afford both (12, 18) and (10, 20), but she will not choose (12, 18).
d) Until we don’t know her preferences, we cannot tell whether she would
choose a point on the budget line or inside the budget set.
e) Given the information we can conclude that she is indifferent between (10, 20)
and (12, 19).

5. Anna and Jack decide to order some soft drinks at the restaurant. Jack tells Anna that
he prefers Pepsi to Sprite, Sprite to Fanta, and Fanta to orange juice. Anna decides to
order some lemonade and lets Jack try it. Jack tells her that he definitely prefers the
lemonade to both Sprite and orange juice, but he decides to order Pepsi.
Unfortunately, some drinks including Pepsi are not on the menu, so Jack decides to go
for the lemonade. However, just after ordering, he changes his mind and goes for
Fanta. What can we tell about Jack’s preferences?
a) His preferences do not violate rationality based on the information we have.
b) He has irrational preferences because his choices suggest that his preferences are
certainly not complete.
c) He has irrational preferences because his choices suggest that his preferences are
not reflexive.
d) He has irrational preferences because his choices suggest that his preferences are
not transitive.

6. Suppose consumer’s preferences are such that for any two bundles 𝑋 = (𝑥1 , 𝑥2 ) and
𝑌 = (𝑦1 , 𝑦2 ) the following two properties are satisfied
▪ 𝑋 ⪰ 𝑌 ⇔ 𝑚𝑖𝑛[2𝑥1, 3𝑥2 ] ≥ 𝑚𝑖𝑛[2𝑦1, 3𝑦2 ] ;
▪ 𝑋 ≻ 𝑌 ⇔ 𝑚𝑖𝑛[2𝑥1, 3𝑥2 ] > 𝑚𝑖𝑛[2𝑦1, 3𝑦2 ] ;

Choose statements that are true:

a) the consumer is indifferent between the bundle (3,2) and the bundle (3, 3).

b) the consumer is indifferent between the bundle (3,2) and the bundle (4,2).

c) the consumer prefers the bundle (3,2) to the bundle (2,4)

d) the consumer prefers the bundle (6,4) to the bundle (1,8)

e) All of the above.

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Problem solving:
7. Felicity is studying economics and political science. She can read 30 pages of political
science per hour but only 5 pages of economics per hour. This week she has a 50-page
assignment in economics and a 150- page assignment in political science. Because of
sorority rush, she cannot devote more than 10 hours to studying these subjects this
week. She realizes she cannot complete all of her assignments but is determined to
complete at least 30 pages of her economics reading. Draw a graph with pages of
economics on the horizontal axis and pages of political science on the vertical axis.
On this graph, show the possibilities that are consistent with the constraints that
Felicity has imposed on herself.

8. Suppose Josephine eats 7 kg of apples per week and smokes 10 ounces of tobacco per
week. She doesn’t buy anything else and spends her entire budget of 54 euros buying
apples and tobacco once a week. One ounce of tobacco costs twice more than 1 kg of
apples. The government decides to introduce an additional tax on tobacco products.
As a result, the price of one ounce of tobacco increases by 25%. At the same time, the
supermarket introduces a discount of 0.5 euro per kg of fresh fruit in excess of 3 kg.
Draw the old and the new budget constraints for Josephine.