126 CHAPTER 3 A Consumer’s Constrained Choice

is 0 if X + Z … 5 and is X + Z otherwise. Draw consumer’s budget line change when a manufacturer

Fiona’s indifference curves. Which of our preference offers a 10% discount on purchases that are in excess
assumptions does this example violate? of 25 units? How does it change if the discount is appli-
*2.4 Tiffany’s constant elasticity of substitution (CES) cable on all units when total purchases exceed 25 units?
utility function is U(q1, q2) = (q1ρ + q2ρ)1/ρ. What
is the positive monotonic transformation such 4. Constrained Consumer Choice
that Tiffany’s utility function is equivalent to (has 4.1 Suppose that Polish consumers pay twice as much
the same preference ordering) the utility function for oranges as they pay for apples, whereas Spanish
ρ ρ
U(q1, q2) = q1 + q2? M consumers pay half as much for oranges as they pay
*2.5 Suppose we calculate the MRS at a particular for apples. Assuming that consumers maximize their
bundle for a consumer whose utility function is utility, which country’s consumers have a higher
U(q1, q2). If we use a positive monotonic trans- marginal rate of substitution of oranges for apples?
formation, F, to obtain a new utility function, Explain your answer.
V(q1, q2) = F(U(q1, q2)), then this new utility func- 4.2 Anton consumes dumplings, q1, and soup, q2. Each
tion contains the same information about the con- of his indifference curves are characterized by strictly
sumer’s rankings of bundles. Prove that the MRS is diminishing marginal rates of substitution. Anton is
the same as with the original utility function. M indifferent between consuming a bundle of nine dump-
*2.6 What is the MRS for the CES utility function lings along with three bowls of soup or a bundle of
(which is slightly different from the one in the text) 17 dumplings along with one bowl of soup. Would he
U(q1, q2) = (aq1ρ + [1 - a]q2ρ)1/ρ? (Hint: Look at prefer these bundles over consuming a bundle of two
Solved Problem 3.2.) M bowls of soup along with 13 dumplings? Why? M
2.7 If José Maria’s utility function is U(q1, q2) = *4.3 Andy purchases only two goods, apples (q1) and
q1 + Aq1a qb2 + q2, what is his marginal utility from q2? kumquats (q2). He has an income of $40 and can
What is his marginal rate of substitution between these buy apples at $2 per pound and kumquats at $4 per
two goods? (Hint: Look at Solved Problem 3.2.) M pound. His utility function is U(q1, q2) = 3q1 + 5q2.
2.8 Phil’s quasilinear utility function is U(q1, q2) = What is his marginal utility for apples, and what is
ln q1 + q2. Show that his MRS is the same on all of his marginal utility for kumquats? What bundle of
his indifference curves at a given q1. (Hint: Look at apples and kumquats should he purchase to maxi-
Solved Problem 3.3.) M mize his utility? Why? M
2.9 The city of Feechi has a utility function over social 4.4 Mark consumes only cookies and books. At his cur-
benefits, S, and infrastructure investment, I, given by rent consumption bundle, his marginal utility from
U = lnS + lnI. Daliah and Tanish are the two can- books is 10 and from cookies is 5. Each book costs
didates running in the local mayoral elections. Given $10, and each cookie costs $2. Is he maximizing his
UD = 32SI and UT = S + I, which of the candidates utility? Explain. If he is not, how can he increase his
should the citizens of Feechi vote for? Explain. M utility while keeping his total expenditure constant? M
4.5 Taxes are often imposed on goods imported from for-
3. Budget Constraint
eign countries. Such “tariffs or custom duties” raise
*3.1 What is the effect of a 50% income tax on Dale’s revenue and, by increasing the relative price of for-
budget line and opportunity set? eign goods, protect domestic industries from foreign
3.2 What happens to a consumer’s optimal choice of competition. Countries participating in the European
goods if all prices and the consumer’s income dou- Union (EU) have eliminated tariffs between member
ble? (Hint: What happens to the intercepts of the countries and imposed a uniform system of tariffs
budget constraint?) on imports from other countries. Consider an EU
3.3 In 1938, the government of Finland started giving consumer who buys both expensive running shoes
expectant mothers a free maternity package that made within the EU and inexpensive running shoes
includes progressively sized baby clothes, warm imported from a non-member country. The expen-
coat, sheets, a sleeping bag, and personal care items. sive shoes cost 140 euros and the inexpensive shoes
What started as a way to counteract low birth rates cost 35 euros (without the tariff). If the tariff on
and high infant mortality continues even today in the inexpensive shoes is 16.9%, use an indifference
the country. Assume that an expectant mother has curve–budget line analysis to show how imposing the
€2,000. How does her budget line and opportunity tariff affects the bundle of shoes the consumer buys
set change when she is given the maternity package, compared to what she/he would have bought in the
which is worth €170? absence of the tariff. Can you predict whether she/he
3.4 Manufacturers often offer volume discounts to those will buy relatively more expensive running shoes after
buying large quantities of their products. How does a the tariff? Why or why not?