Question 1

An economics professor went out to dinner one night and observed one of her students drinking heavily.The next day was a final exam.When the professor's husband found out the student was in her class, he said the student's behavior was irrational.The professor disagreed.Under what condition is behavior irrational according to the properties of consumer behavior discussed in the chapter? What situations could make the student's behavior rational?

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Question 2

Sally Consumer's indifference curve between cigarettes and hamburgers is upward sloping.Based on this information, can we conclude that Sally views cigarettes as "bads" and hamburgers as "goods"? Explain.

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Question 3

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.
B.
  Figure 4-9a
  b.Since both goods are normal, an increase in income leads to greater consumption of each good, as illustrated by the movement from C to D in Figure 4-9b.
Figure 4-9b

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Question 4

While at a discount shoe store, a customer asked a clerk, "I see that your shoes are 'buy one, get one free - limit one free pair per customer.' Will you sell me one pair for half-price?" The clerk answered, "I can't do that." When the customer started to leave the store, the clerk hastily offered, "However, I am authorized to give you a 40 percent discount on any pair in the store." Assuming the consumer has $200 to spend on shoes (X) or all other goods (Y), and that shoes cost $100 per pair, answer the following questions:
a.Illustrate the consumer's opportunity set with the "buy one, get one free" deal and with a 40 percent discount.
b.Why was the 40 percent discount offered only after the consumer rejected the "buy one, get one free" deal and started to leave the store?
c.Why was the clerk willing to offer a "buy one, get one free" deal, but unwilling to sell a pair of shoes for half-price?
A.Based on this the clerk concluded that the consumer is indifferent between bundle A and bundle N in Figure 4-17.By offering the consumer the 40 percent discount on a single pair of shoes, the budget line is AM, and the consumer would just as soon buy a pair of shoes for $60 as leave the store.The purchase yields the store $60 in revenue for the pair of shoes, which is greater than the $50 it would have earned if the clerk let the
consumer buy a pair of shoes at half price.

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Question 5

Suppose a consumer derives satisfaction from consuming two types of hamburgers, X and Y.
a.Graph the budget line of the consumer under the assumption that he is offered a "buy two, get one free" deal for burger X (limit one free burger).
b.Graph the budget constraint under the assumption that the producer of burger Y also offers a "buy two, get one free" deal (limit one free burger).
c.Explain in words why each of the above budget constraints looks as it does.
C.After the third one, the deal becomes ineffective for you.Hence, CD has the same slope as AB does.
  Figure 4-13a Figure 4-13b

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Question 6

Explain what would happen to the equilibrium consumption of two goods, X and Y, if (a) income doubled and all prices tripled, (b) all prices doubled and income tripled, and (c) all prices and income doubled.In each case, show the effects when both goods are normal goods and when one good is a normal good and the other an inferior good.

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Question 7

In order to encourage energy conservation, many pubic utility companies charge consumers a higher rate on units of electricity consumed in excess of some threshold amount.In contrast, a common marketing ploy by other firms is to offer "quantity discounts" to consumers who purchase large quantities of a good.To illustrate how these pricing schemes alter the typical consumer's opportunity set, suppose income = $100,

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Question 8

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.

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Question 9

Use indifference curve and constraint analysis to analyze the behavior of employees who are paid
a.An hourly wage rate of $4 per hour.
b.A fixed hour wage of $4 per hour; plus an overtime bonus of $4 for every hour worked in excess of eight hours.
c.A fixed salary of $40 per day, plus $4 for each hour worked.
d.Which of the above schemes would yield the largest number of hours worked? Explain.

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Question 10

Draw the opportunity set of a consumer with an income of $200 who faces prices of

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Question 11

A consumer has a choice of spending $13,000 on a Honda or $9,000 on a Saturn.She is observed buying the Saturn.Does this mean the consumer prefers the Saturn? Explain your answer.

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Question 12

Joe consumes 10 units of food and 12 units of clothing.If food is an inferior good, will Joe be indifferent between receiving a $12 gift certificate at a clothing store and receiving $12 in cash? Explain and show graphically.

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Question 13

Suppose a worker is paid according to the following pay scheme: For every unit produced, the worker gets $8.Assume a worker can produce three units per hour.
a.Express the worker's earnings as a function of hours worked.
b.Graph the equation for earnings.
c.Graphically depict equilibrium, and show the earnings and hours worked by the employee.
d.Do you think that from the firm's point of view, this scheme is better, worse, or the same as paying the worker a wage of $24 per hour? Explain carefully.

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Question 14

Suppose you are the manager of a firm that produces Ultrasweet, a sugar substitute.Show graphically the effect of a reduction in the price of Sweet and Healthy, a competitor's product, on a typical consumer's consumption of Ultrasweet.

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Quiz 4: The Theory of Individual Behavior

Sally Consumer's indifference curve between cigarettes and hamburgers is upward sloping.Based on this information, can we conclude that Sally views cigarettes as "bads" and hamburgers as "goods"? Explain.

Draw the opportunity set of a consumer with an income of $200 who faces prices of

A consumer has a choice of spending $13,000 on a Honda or $9,000 on a Saturn.She is observed buying the Saturn.Does this mean the consumer prefers the Saturn? Explain your answer.

Joe consumes 10 units of food and 12 units of clothing.If food is an inferior good, will Joe be indifferent between receiving a $12 gift certificate at a clothing store and receiving $12 in cash? Explain and show graphically.

Suppose you are the manager of a firm that produces Ultrasweet, a sugar substitute.Show graphically the effect of a reduction in the price of Sweet and Healthy, a competitor's product, on a typical consumer's consumption of Ultrasweet.