Temple University

Department of Economics

Intermediate Microeconomic Theory

Consumer Choice

Name

1. Gore Monde is a food lover who lives on bread and wine. Let his marginal utility of bread, MUb, be given algebraically by the expression MUb = 40 - 5b.  Similarly, let his marginal utility of wine be MUw = 30 - w.  The current prices of bread and wine are Pb = 5 and Pw = 1, respectively.  Gore's income is 40.

a. What is the greatest quantity of bread that Gore can consume?

b. What is the greatest quantity of wine that Gore can consume?

c. What is the slope of Gore's budget constraint when you put wine on the horizontal axis and bread on the vertical axis?

d. Given the prices and Gore's income, how much bread and wine should he consume? Bread = , Wine =

e. Suppose that Gore's income falls to 10. How much bread and wine will he consume now? Bread = , Wine =

2. Al Fabette consumes x's and y's.  With y on the vertical and x on the horizontal, his marginal rate of substitution in consumption is given by MRS = y/x.  At a shop on Sesame Street he can buy his x's and y's at the prices Px = 5 and Py = 1.

a. Fill in the boxes below to create Al's income expansion path.

 intercept slope y = + x

b. Suppose that the price of a unit of x falls to Px=4.  Then Al's income expansion path will become

flatter   steeper no change

3. Put y on the vertical and x on the horizontal. Let Pepe Smith have the marginal rate of substitution MRS = y.  His income is 120 and the price of y is Py = 1.

a. In the box below write an expression for Pepe's price expansion path:

b. In the box below write an expression for Pepe's demand curve associated with the price expansion path you found in part a of the question. Write your expression in the box below:

Hints: MRSxy = MUx/MUy = Px/Py