CHAPTER 4 - REVIEW

I. Answer true or false with short explanation and use diagram

if necessary.

1. The change in consumer’s income results in the change in the slope of

the budget line.
2. Henry is playing game and he feels that the game is less and less
attractive by the day but he continues to play. This situation shows
that Henry’s total utility is decreasing at an increasing rate.
3. Utility function U = aX + bY (where X, Y are 2 goods in
consumption) reflects a bowed-in indifference curve.
4. Budget line is always a straight and continuous line in any cases.
5. Indifference curves are always flatter and flatter when consumer
chooses more quantity of good in horizontal axis.
6. When prices of 2 goods are constant, budget line shift parallelly when
and only when consumer’s income changes.

II. Exercises
1. Utility function U=X.Y, Px=2$, Py=4$, I=240$
a. Calculate MUx, MUy
b. Calculate optimal combination of consumption.
2. A consumer decides to spend his income of 200$ on X and Y.
a. PX = 4$, PY = 2$. Draw this consumer’s budget line
b. Due to the decrease in quantity supplied, Y’s price goes up to 4$.
Draw new budget line.
c. There is a promotion from the seller. Buying 20 units of Y at price of
2$, 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
price of 2$ (except the bonus). Draw new budget line.