Exercise 6.

1
Anna earns $150 a week and she consumes fish
and shrimp. The price of fish is $3 a pound and
the price of shrimp is $5 a pound. Anna can
therefore buy a maximum of _____ pounds of
fish or a maximum of _____ pounds of shrimp.
(A) 30, 50
(B) 50, 30
(C) 15, 30
(D) 30,15
(E) 50,15
1

Answers to Exercise 6.1

The correct answer is (B).
Out of $150, he can buy a maximum of
$150/$3 = 50 pounds of fish, or a
maximum of $150/$5 = 30 pounds of
shrimps.

Exercise 6.2
The quantity of Revlon nail polish demanded by
Jen decreased after the price of Revlon nail
polish increased. Jen decides to find a cheaper
brand of nail polish. This is called

A)
substitution effect of a price change

B)
increase in buyer's reservation price

C)
income effect of a price change

D)
shift in the supply curve

E)
decrease in buyer's reservation price
3

Answers to Exercise 6.2

The correct answer is (A)
When a consumer switch to a cheaper
substitute due to a higher price of the
original product, this reflects the
substitution effect of a price change.

Exercise 6.3
Units
1
2
3
4

Total Utility
of Food
75
135
180
210

Total utility of rooms

480
720
960
1120

Refer to the table above. If the price of Food is $5 and the

price of Rooms is $80, then the best spending
consumption implies _____ units of Food and ______
Rooms will be purchased.
(A) 4;3
(B) 3;4
(C) 4;4
(D) 3;3
(E) 4;1
5

Answers to Exercise 6.3

The correct answer is (E).
We need to calculate the
MU/P for both products.
The optimal consumption
combination occurs when
(MU/P)Food = (MU/P)Room.
From the table, the best
combination is 4 units of
food and 1 unit of room
Note that if information on
income is available, then
this combination should
also exhaust the income.

Unit

MU/P
Food

MU/P
Room

15

12

Exercise 6.4
(a) Explain why the best affordable
point is the point at which the budget
line touches the highest attainable
indifference curve.
(b) What happen when the consumer
has a higher income and one of the
product is an inferior good?

Answers to Exercise 6.4(a)

At the tangency point of an indifference
curve with the budget line, the
consumer gets the highest total utility
given his budget constraint, and hence
the point is the optimal consumption
point. Y
IC3
IC2
IC1
X

Answers to Exercise 6.4(b)

With a higher
income, the budget
line shifts outwards
in a parallel manner.
Assume that X is
inferior and Y is
normal. The final
equilibrium must
indicate a smaller
quantity of X
demanded and a
larger Y demanded

IC2
IC1
X2 X1

Exercise 6.5
Considers two products, A and B.
Represent A on the Y axis and B on the
X axis and establish the best affordable
point. What happen to the best
affordable point when the price of B
increases and B is a normal good?

10

Answers to Exercise 6.5

With a higher price
of B, the budget line
becomes steeper.
Consumption of B
decreases

A
F
G

E
IC2
B2

IC1
B1