Economics Department Faculty of Economics and Political Science English Section, Second Year Cairo University Intermediate Microeconomics

Theory Fall 2013 Dr. Heba Nassar & Dr. Abdel-Hameed Nawar Mr. Ahmed Ragab & Ms. Nesreen Selim Tutorial (5) on Chapter (5): Choice (Q1) TRUE/FALSE:

(1) At a boundary optimum, a consumers indifference curve must be tangent to her budget line. (2) Shadys utility function is U(x, y) = xy2. His marginal rate of substitution between x and y does not change if the amount of both goods doubles. (3) Ahmed has the utility function U(x, y) = max{x, y}. If the price of x is the same as the price of y, Ahmed will buy equal amounts of x and y. (4) If a consumer does not have convex preferences, then a point of tangency between her indifference curve and her budget line must be an optimal consumption point.
(5) Salmas utility function is U(x, y) = (x + 2) (y + 1). If her

consumption of both x and y is doubled, then her marginal rate of substitution between x and y remains constant. (6) Lamiaa has utility function U(x, y) = x + 2y. If the price of x is L.E.1 and the price of y is 50 piasters then Lamiaa must consume equal amounts of both goods in order to maximize her utility. (7) Magdas utility function is U(x, y) = min{x, y}. She maximizes her utility subject to a budget constraint. The price of x is the same as the price of y. If the price of x rises and the price of y and her income remain constant, then her consumption of y will certainly decrease. (8) Monas utility function is U(x, y) = min{x + 2y, y + 2x}. Mona maximizes her utility subject to a budget constraint. If she chooses the bundle (5, 6), then the price of x must be exactly twice the price of y.
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(Q2) MULTIPLE CHOICE QUESTIONS:

(1) Hends utility function is U(X, Y) = (X + 2)(Y + 1). If her marginal rate of substitution is -3 and she is consuming 12 units of good X, how many units of good Y must she be consuming? a. 15 b. 46 c. 24 d. 41 e. 7 (2) Perys utility function is min{x + 3y, 3x + y}. Simons utility function is min{3x + 9y, 9x + 3y}. Pery and Simon have the same income and face the same prices. a. Pery and Simon will demand the same amount of good x. b. Pery will demand more of good y than Simon. c. Simon will demand more of good y than Pery. d. Each will prefer the others consumption bundle to his own. e. None of the above. (3) Kareems utility function is U(x, y) = (x + 3) (y + 2). The price of x is L.E.1. The price of y is L.E.2. At all incomes for which Kareem consumes positive amounts of both goods, he will consume: a. units of x more than twice his consumption from y. b. units of y more than twice his consumption from x. c. one more unit of x than of y. d. one more unit of y than of x. e. 2/3 as many units of y as of x.

(4) Asmaa consumes only two goods, x and y. Her income doubles and the prices of the two goods remain unchanged. Assuming that she is a utility maximizer and likes both goods, a. she will consume more of both goods. b. the ratio of her consumption of x to y remains constant. c. her utility doubles. d. if her preferences are convex, she must consume more x. e. None of the above.

(5) Jihan consumes two commodities x and y. Her utility function is min{x + 2y, y + 2x}. She chooses to buy 10 units of good x and 20 units of good y. The price of good x is L.E.1. Janets income is a. L.E.40. b. L.E.50. c. L.E.30. d. L.E.20. e. There is not enough information in the problem to determine her income as we are not told the price of good y. (6) Khalid has a utility function U (xA, x B) = xAx B, the price of apples is L.E.1, and the price of bananas is L.E.2. If Khalids income were L.E.240, how many units of bananas would he consume if he chose the bundle that maximized his utility subject to his budget constraint? a. 30 b. 12 c. 60 d. 180 e. 120

(7) Moatazs utility function is U (xA, xB) = xAxB. If Moatazs income is L.E.40, the price of apples is L.E.3, and the price of bananas is L.E.5, how many apples are there in the best bundle that Moataz can afford? a. 13.33 b. 9 c. 6 d. 7 e. 6.67 (8) Adams utility function is U(x1, x 2) = 4x11/2 + x2. If the price of nuts (good 1) is L.E.1, the price of strawberries (good 2) is L.E.2, and his income is L.E.145, how many units of nuts will Adam choose? a. 6 b. 16 c. 32 d. 19 e. 8
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(Q3) QUESTIONS & PROBLEMS:

(1) Atef consumes cocoa and cheese. cocoa is sold in an unusual way. There is only one supplier, and the more cocoa you buy from him, the higher the price you have to pay per unit. In fact x units of cocoa will cost Casper x2 pounds. Cheese is sold in the usual way at a price of 2 pounds per unit. Atefs income is 16 pounds and his utility function is U(x, y) = 3x + y, where x is his consumption of cocoa and y is his consumption of cheese. a. Sketch Atefs budget set and shade it in. b. Sketch some of his indifference curves and label the point that he chooses. (2) Define the monotonic transformation of a utility function, showing some examples of monotnic transformation for some utility functions.

(3) Discuss, using graphs, several examples where the optimal choice is represented by a boundary optimum, and others where the optimal choice is an interior optimum.