UNIVERSITY OF THE PHILIPPINES

SCHOOL OF ECONOMICS
ECONOMICS 100.2
Introduction to Microeconomic Theory and Policy
Problem Set No. 5

Prof. Aleli Kraft / Ang / Panti / Siton 2nd Semester, AY 2016-2017

I. Multiple Choice:
1. Economists represent a consumer's preferences using
a. indifference curves
b. demand curves.
c. budget constraints.
d. supply curves.

For numbers 2, 3, and 4, use the figure below.

Books

D
CDs

2. Which point in the figure showing a consumers budget constraint represents the consumer's
income divided by the price of a CD?
a. point A
b. point B
c. point C
d. point D

3. A consumer who chooses to spend all of her income could be at which point(s) on the budget
constraint?
a. A only
b. E only
c. B, C, or D only
d. A, B, C, or D only

4. All of the points identified in the figure represent affordable consumption options with the
exception of
a. A.
b. E.
c. A and E.
d. None. All points are affordable.
For numbers 5 and 6, see the figure below.

Donuts

A E

Indifference Curve 3
D C

Indifference Curve 2
Indifference Curve 1

Cake

5. When comparing bundle A to bundle E, the consumer

a. prefers bundle A because it contains more donuts.
b. prefers bundle E because it lies on a higher indifference curve.
c. prefers bundle E because it contains more donuts.
d. is indifferent between the two bundles.

6. A person that chooses to consume bundle C is likely to

a. receive higher total satisfaction at bundle C than at bundle A.
b. spend more on bundle C than bundle A.
c. receive higher marginal utility from cake than from donuts.
d. receive higher marginal utility from donuts than from cake.

7. The following diagram shows one indifference curve representing the preferences for goods X
and Y for one consumer.

y
10

6
A
5

3
B
2

1 2 3 4 5 6 7 8 9 x
 What is the marginal rate of substitution between points A and B?
a. 2/5
b. 1
c. 5/2
d. 3

8. Zordon enjoys fishing and hunting. He divides his leisure hours between the two outdoor
activities. Suppose we were to draw Zordons indifference curves for the two activities, placing
fishing on the horizontal axis and hunting on the vertical axis. If Zordons indifference curves are
bowed inward, then
a. the rate at which he is willing to give up an hour of hunting for an hour of fishing is
constant because he must derive the same enjoyment out of each activity.
b. the rate at which he is willing to give up an hour of hunting for an hour of fishing
changes depending on how many hours of each activity he has done. For example, if
Zordon has already fished a lot in one week, he will be less willing to give up an hour of
fishing for an hour of hunting than if he has only fished a little that week.
c. Zordons indifference curves will not cross. When indifference curves are bowed
outward, the indifference curves must cross.
d. the rate at which he is willing to give up an hour of hunting for an hour of fishing
changes depending on how many hours of each activity he has done. For example, if
Zordon has already fished a lot in one week, he will be more willing to give up an hour of
fishing for an hour of hunting than if he has only fished a little that week.

9. When two goods are perfect complements, the indifference curve is

a. a horizontal straight line.
b. bowed outward.
c. a right angle.
d. a downward-sloping straight line.

10. Rita goes to the movies every Sunday afternoon. The movie theater offers 4 combinations of
popcorn and beverages: the mini-combo costs Php 5 and includes a small popcorn and a small
drink, the medium-combo costs Php 7 and includes a medium popcorn and a medium drink, the
value-combo also costs Php 7 and includes a small popcorn and a large drink, and the large-
combo costs Php 9 and includes a large popcorn and a large drink. Rita always purchases the
value-combo. We can conclude that
a. Rita cannot afford the large-combo.
b. Rita cannot afford the medium-combo.
c. Rita prefers a combo with a larger popcorn-to-beverage ratio.
d. Rita prefers a combo with a smaller popcorn-to-beverage ratio.
II. Word Problems:
1. Five consumers have the following marginal utility of apples and pears:

Marginal Utility of Apples Marginal Utility of Pears

Jason 12 6
Trinity 6 6
Billy 6 3
Kimberly 3 6
Zack 12 3

The price of an apple is Php 2, and the price of a pear is Php 1. Which, if any, of these consumers
are optimizing over their choice of fruit? For those who are not, how should they change their
spending?

2. Answer the following questions:

a. What are Giffen goods? Give an example.
b. What are inferior goods? Give an example.
c. Which of the following statements are true or false? Explain why your answer for each
statement.
i. If a good is a Giffen good, then it is also an inferior good.
ii. If a good is an inferior good, then it is also a Giffen good.

3. A welfare system is created to give income to much poorer households. The poorer a household
is, the more welfare payment it gets. For example, those who have zero income tend to get the
highest welfare payments. This program, hence, may have some implications on a households
supply for labor.
a. Graph the households budget constraint if there were no welfare system existing. Would
this budget constraint change if there is an existing welfare system? Show this change (if
any) on the budget constraint in the same diagram.
b. Using indifference curves, show (in the same diagram) how an existing welfare system
could affect the hours worked by the household. Explain your answer. (Tip: Use income
and substitution effects to make your case on the systems effect.)
c. Show the effect of the welfare system on the well-being of the household in the same
diagram. Explain your answer.