EC270: Microeconomic Theory I
Chapters 5: Choice
Practice Questions
Answers
©L. McLeod
Fall 2025
1 Multiple Choice - Interior Solutions
1. (e) 6. (e)
2. (d) 7. (c)
3. (b) 8. (c)
4. (e) 9. (b)
5. (d) 10. (b)
11. (a)
2 Multiple Choice - Corner Solutions
12. (c)
13. (a)
14. (c)
15. (c)
16. (c)
17. (c)
1
,Answers Practice Questions (Chapters 5: Choice) EC270: Microeconomic Theory I
2.1 Economic Concepts to Remember
:
2 ©L. McLeod, Fall 2025
, Answers Practice Questions (Chapters 5: Choice) EC270: Microeconomic Theory I
2.2 Multiple Choice Solutions
Multiple Choice - Interior Solutions
Question 1 : Charlie has preferences for consuming apples (xA ) and bananas (xB )
represented by the utility function u(xA , xB ) = xA xB . Assume the price of apples is
$1, the price of bananas is $2, and Charlie’s income is $160. How many units of bananas
would he consume if he chose the bundle that maximized his utility subject to his budget
constraint?
Answer: From the question, we know pA = 1, pB = 2, and m = 160 which allows us to
write the budget constraint as: xA + 2xB = 160. We can also recognize the utility function
as a Cobb-Douglas utility function. This means that the bundle maximizing Charlie’s
utility (subject to his budget constraint) will occur at a tangency between an indifference
curve and the budget constraint. To find the tangency, first find the slope of the budget
line then the slope of an indifference curve (i.e., the MRS):
pA 1
slope of budget line = − =−
pB 2
M UA xB
slope of indifference curve = M RS = − =−
M UB xA
pA
tangency occurs when : M RS = −
pB
x∗B 1
− ∗ =−
xA 2
Therefore, we know Charlie will consume apples and bananas such that: 2x∗B = x∗A .
Substitute this into the budget constraint and solve for x∗A and x∗B :
x∗A + 2x∗B = 160
x∗A + (x∗A ) = 160
x∗A = 80
2x∗B = x∗A
x∗B = 40
Question 2 : Charlie has preferences for consuming apples (xA ) and bananas (xB )
represented by the utility function u(xA , xB ) = xA xB . Assume Charlie’s income
increases to $200. How many units of bananas would he consume if he chose the bundle
that maximized his utility subject to his budget constraint?
Answer: Similar to question 1, but now m = 200. Note the change in income does not
change the slope of the budget line (or indifference curve), so the same tangency condition
applies meaning Charlie will still consume apples and bananas such that: 2x∗B = x∗A .
3 ©L. McLeod, Fall 2025
Chapters 5: Choice
Practice Questions
Answers
©L. McLeod
Fall 2025
1 Multiple Choice - Interior Solutions
1. (e) 6. (e)
2. (d) 7. (c)
3. (b) 8. (c)
4. (e) 9. (b)
5. (d) 10. (b)
11. (a)
2 Multiple Choice - Corner Solutions
12. (c)
13. (a)
14. (c)
15. (c)
16. (c)
17. (c)
1
,Answers Practice Questions (Chapters 5: Choice) EC270: Microeconomic Theory I
2.1 Economic Concepts to Remember
:
2 ©L. McLeod, Fall 2025
, Answers Practice Questions (Chapters 5: Choice) EC270: Microeconomic Theory I
2.2 Multiple Choice Solutions
Multiple Choice - Interior Solutions
Question 1 : Charlie has preferences for consuming apples (xA ) and bananas (xB )
represented by the utility function u(xA , xB ) = xA xB . Assume the price of apples is
$1, the price of bananas is $2, and Charlie’s income is $160. How many units of bananas
would he consume if he chose the bundle that maximized his utility subject to his budget
constraint?
Answer: From the question, we know pA = 1, pB = 2, and m = 160 which allows us to
write the budget constraint as: xA + 2xB = 160. We can also recognize the utility function
as a Cobb-Douglas utility function. This means that the bundle maximizing Charlie’s
utility (subject to his budget constraint) will occur at a tangency between an indifference
curve and the budget constraint. To find the tangency, first find the slope of the budget
line then the slope of an indifference curve (i.e., the MRS):
pA 1
slope of budget line = − =−
pB 2
M UA xB
slope of indifference curve = M RS = − =−
M UB xA
pA
tangency occurs when : M RS = −
pB
x∗B 1
− ∗ =−
xA 2
Therefore, we know Charlie will consume apples and bananas such that: 2x∗B = x∗A .
Substitute this into the budget constraint and solve for x∗A and x∗B :
x∗A + 2x∗B = 160
x∗A + (x∗A ) = 160
x∗A = 80
2x∗B = x∗A
x∗B = 40
Question 2 : Charlie has preferences for consuming apples (xA ) and bananas (xB )
represented by the utility function u(xA , xB ) = xA xB . Assume Charlie’s income
increases to $200. How many units of bananas would he consume if he chose the bundle
that maximized his utility subject to his budget constraint?
Answer: Similar to question 1, but now m = 200. Note the change in income does not
change the slope of the budget line (or indifference curve), so the same tangency condition
applies meaning Charlie will still consume apples and bananas such that: 2x∗B = x∗A .
3 ©L. McLeod, Fall 2025
