Problem Set-2

B.A. Eco (Hons.) Sem- III Intermediate Microeconomics I

The Budget Constraint & The consumer’s optimal choice

1 Consider a consumer who buys two goods x an y with utility function
u x, y   2 x  y . The consumer’s income is 20 and price of y is 4.

(a) Compute the optimal consumption bundle when the price of x is equal to
1. (2013)

2 A person wants to join swimming pool that charges Rs. 10 per visit to non-
members and Rs. 5 per visit with an annual membership fee of Rs. 20. If his
income is Rs. 100 and price of other goods is Rs. 1, then

(a) Draw the budget lines with appropriate intercept under both situations
as member and non-member. (2014)

3 Consider a consumer who buys two goods x and y with utility function 𝑢(𝑥, 𝑦) =
𝑥𝑦. The consumer’s income is Rs. 40 and prices of 𝑥 𝑎𝑛𝑑 𝑦 are Rs. 2 arid Rs. 1,
respectively.

(a) Compute the optimal consumption bundle.

(b) If the price of x falls to Rs. 1, what is the new optimal bundle? (2014)

4 An individual always consumers one cheese slice with two bread slices and the
prices of a cheese slice and a bread slice are Rs. 3 and Rs. 1 respectively.

(a) How much of the two commodities will he consumer under alternative
Income of Rs. 30 and Rs. 60? (2014)

5 Vinita likes both tennis rackets and tennis shoes and would like to consume
both. At the moment, she has many of both and her marginal rate of
substitution (MRS) of rackets for shoes is 3. Unused rackets and shoes may be
returned to the store for a refund. The current price for a racket is Rupees 200
and the price for a pair of shoes is Rupees 100. Is her present consumption
bundle an optimum? Suggest a way for Vinita to make herself better off.

(2016)

6 For a consumer, the utility function for two goods x and y is given by
U x, y   2 x  2 y xy  . He earns an income of Rupees 1000 while P x  50
1/ 2

and P y  50. Find his optimal consumption choice. (2016)

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 Problem Set-2

B.A. Eco (Hons.) Sem- III Intermediate Microeconomics I

7 A consumer always purchases at least 4 unit of good X. He pays a price p up till
17 units of X. If he purchases more than 17 units, then he must pay 10% more
on each additional unit. Taking the other good as the numeraire :

(a) Set up the equation of the budget constraint.

(b) Graphically show the budget set. (2017)

8 Consumer’s consumption bundle is described by  x1 , x 2  . His money income is

Rs. 100 and price of good 1 ( p1 ) is Rs. 10 and price of good 2  p2  is Rs. 10.

(i) How does his budget constraint change when government gives lumpsum
subsidy of Rs. 50 regardless his consumption behavior?

(ii) How does his original budget constraint change when the government
gives subsidy of Rs. 5 per unit on good 1.

(iii) Compare his utility levels in case (i) and (ii) if his utility function is
u  x1 , x 2   x1 , x 2 . (2018)

9 If price of good X is Rs. 5 and price of good Y is Rs. 10. He has to spend all his
money income of Rs. 200 on goods X and Y only. Find the optimal consumption
of X and Y. Illustrate diagrammatically. (2018)

10 If a consumer’s utility function is u  x, y  = x 2 + y2 and his money income is Rs.

400 has to spend on only two goods X and Y, the price of X is Rs. 20 Using
diagrams :

(i) Find the optimal choice when price of Y (p y ) is Rs. 25.

(ii) Find the optimal choice when price of Y (p y ) is Rs. 16.

(iii) Calculate substitution and income effects for the good Y when p y
decreases from 25 to 16. (2018)

12 Assume a person has a utility function U(x,y) =(x)(y) 1/2 . Let initial
endownment of consumer be (w1,w2) =(10,10) and initial prices (p1,p2) =(2,2).
Both the goods are normal. Then price of good 2 changes from 2 to 1, so that
(p1, p2’) =(2,1)

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 Problem Set-2

B.A. Eco (Hons.) Sem- III Intermediate Microeconomics I

(i) Find out the initial optimum bundle. How much of commodity 2 does the
consumer buy or sell? What income level will make the consumer buy
the initial bundle at new price? (2020)

13 Given utility function U (x,y) =x 2+y 2 , Px =2, Py=4 and M=50 for a consumer,

(i) Compute optimum consumption. Also show graphically.

(ii) Check if tangency condition holds true. Explain (2020)

14 Rama consumes two goods x and y. Her income is Rs. 1000, x and y are
available at a price of Rs. 4 and Rs. 5 per unit respectively. Her utility function
is u = xy.

(i) Find her optimum consumption bundle in her new budget set situation.
(2020)

15 Given u = x(1+y), px = 1, py = 2, m = 10.

(i) Find out the optimum consumption bundle. Derive income consumption
curve and draw its graph. (2020)

16 There are two goods 𝑥 and 𝑦. The price of 𝑦 is Rs. 4 for the first five units, after
that good 𝑦 is available at free cost till 7 units. Beyond 7 units of good , the
price becomes Rs.5. The price of good 𝑥 remain unchanged at Rs. 2 per unit.
The consumer has an income of Rs. 100. Draw the budget line, taking 𝑥 on the
horizontal axis and 𝑦 on the vertical axis. Also write the equation of the budget
line, covering all cases. (2021)

17 Sudhir has a utility function 𝑢(𝑥, 𝑦) = 𝑥 + 𝑀𝑖𝑛(𝑥, 𝑦), the price of good 𝑥 is Rs. 2
and the price of good 𝑦 is Rs. 1. Sudhir’s income is Rs. 60. Draw the budget line
and find the optimal bundle. (2021)

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