Chapter 4

Problems: 1,2,6,11,19

1. A consumer has $300 to spend on goods X and Y. The market prices of these two
goods are Px = $15 and Py = $5.
a. What is the market rate of substitution between goods X and Y?
b. Illustrate the consumers opportunity set in a carefully labeled diagram.
c. Show how the consumers opportunity set changes if income increases by $300. How
does the $300 increase in income alter the market rate of substitution between goods X
and Y?

2. A consumer is in equilibrium at point A in the accompanying figure. The price of good

X is $5.
a. What is the price of good Y?
b. What is the consumers income?
c. At point A, how many units of good X does the consumer purchase?
d. Suppose the budget line changes so that the consumer achieves a new equilibrium at
point B. What change in the economic environment led to this new equilibrium? Is the
consumer better off or worse off as a result of the price change?

6. In the following figure, a consumer is initially in equilibrium at point C. The

consumers income is $400, and the budget line through point C is given by $400 =
$100X + $200Y. When the consumer is given a $100 gift certificate that is good only at
store X, she moves to a new equilibrium at point D.
a. Determine the prices of goods X and Y.
b. How many units of product Y could be purchased at point A?
c. How many units of product X could be purchased at point E?
d. How many units of product X could be purchased at point B?
e. How many units of product X could be purchased at point F?
f. Based on this consumers preferences, rank bundles A, B, C, and D in order from most
preferred to least preferred.
g. Is product X a normal or an inferior good?

11. It is common for supermarkets to carry both generic (store-label) and brand- name
(producer-label) varieties of sugar and other products. Many consumers view these
products as perfect substitutes, meaning that consumers are always willing to substitute a
constant proportion of the store brand for the producer brand. Consider a consumer who
is always willing to substitute four pounds of a generic store-brand sugar for two pounds
of a brand-name sugar. Do these preferences exhibit a diminishing marginal rate of
substitution between store-brand and producer-brand sugar? Assume that this consumer
has $24 of income to spend on sugar, and the price of store-brand sugar is $1 per pound
and the price of producer-brand sugar is $3 per pound. How much of each type of sugar
will be purchased? How would your answer change if the price of store-brand sugar was
$2 per pound and the price of producer-brand sugar was $3 per pound?

19. A common marketing tactic among many liquor stores is to offer their clientele
quantity (or volume) discounts. For instance, the second-leading brand of wine exported
from Chile sells in the United States for $15 per bottle if the consumer purchases up to
eight bottles. The price of each additional bottle is only $8. If a consumer has $200 to
divide between purchasing this brand of wine and other goods, graphically illustrate how
this marketing tactic affects the consumers budget set if the price of other goods is $1.
Will a consumer ever purchase exactly eight bottles of wine? Explain.