Saul Goodman of "Better Call Saul" fame is a busy lawyer, capable of getting any client out of a legal mess. The problem is because he is always so busy trying to serve his (shady) clients, he does not get enough time to eat proper meals during the day. So, he mostly survives oncoffee(X₁) anddonuts(X₂₎to get him through the day.

Saul's utility function reflecting his preference for coffee and donuts is given by:U(X₁, X₂) = 6X₁X_2.

His daily allowance for his meals is$36. He must spend the entire amount each day to buy his coffee and donuts, i.e., he cannot save any of it.

The price of a cup of coffee is $3 and the price of a donut is $2.

Question 1:Given Saul's utility function, what is Saul's level of utility when he consumes2 cups of coffee (X₁)and2 donuts (X₂)?

a) U = 6

b) U = 12

c) U = 24

d) U = 36

Question 2:If Saul's consumption bundle now has one extra unit of X₁(i.e., X₁is now 3 units) but X₂remains unchanged (i.e., X₂is still 2 units), what is Saul'stotal utilityfrom consuming this bundle?

a) U = 24

b) U = 36

c) U = 30

d) U = 18

Question 3:For Saul's utility function,U = 6X₁X₂, what will be thechangein Saul's utility level whenX₁increases by one unit from2 to 3(X₂still remaining unchanged at 2 units)?

a) Change in utility level is 12.

b) Change in utility level is 15.

c) Change in utility level is 24.

d) Change in utility level is 6.

Question 4:What is Saul'sbudget equation?

a) 36 = 6X1 + 4X2

b) 36 = 2X1 + 3X2

c) 36 = 3X1 + 6X2

d) 36 = 3X1 + 2X2

Question 5:Given Saul's budget and the prices, how many servings of X₁can he buy if heonly chooses to buyX₁(i.e., if he chose X₂to be 0 units)?

a) X1 = 6

b) X1 = 8

c) X1 = 10

d) X1 = 12

Question 6:Given Saul's budget and the prices, how many servings of X₂can he buy if he only chooses to buy X₂(i.e., if he chose X₁to be 0 units)?

a) X2 = 18

b) X2 = 15

c) X2 = 12

d) X2 = 9

Question 7:What type of preferences does Saul have overcoffee (X₁)anddonuts (X₂)?

a) Saul's utility function exhibits that the two dishes are perfect complements for him.

b) Saul's utility function exhibits Cobb Douglas preferences

c) Saul's utility function exhibits that the two products are perfect substitutes for him.

d) Saul has lexicographic preferences for the two goods.

Question 8:Given his utility function, what is Saul'smarginal utility of increasing X₁by 1unit when X₂= 1?

a) 2

b) 6

c) 3

d) 1/6

Question 9:What is themarginal utility of X₂when X₁= 1?

a) 2

b) 3

c) 6

d) 1/6

Question 10: Can you calculate Saul's marginal rate of substitution (MRS) for the following values of X₁and X₂:

X₁= 1 and X₂= 1?

a) 2

b) 1/2

c) 6

d) 1

Question 11:What is the absolute value of theslope of Saul's budget line?

Hint:We know the slope of a consumer's budget line is a negative number. The budget line is a downward-sloping straight line. This question is asking for the absolute value of the slope, which will be a positive number.

a) 2

b) 3/2

c) 1/3

d) 1/2

Question 12:If Saul ends up choosing2 cups of coffee (X₁)and2 donuts (X₂), do you think he will be maximizing his utility level?

a) How can I answer this question? I have not studied the microeconomic theory on consumer behavior and optimal consumption choice in Econ E1010.

b) Yes, Saul will maximize his utility if he chooses this bundle.

c) No, Saul will not maximize his utility level if he chooses this bundle.

d) Maybe.

Question 13:With the help of your knowledge of microeconomic theory, can you identify which consumption bundle will maximize Saul's utility from his daily coffee and donuts consumption?

a) X1 = 0, X2 = 4

b) X1 = 2, X2 = 2

c) X1 = 6, X2 = 9

d) X1 = 9, X2 = 6

Question 14:What is Saul'stotal level of utilitywhen he buys and consumes theoptimal combinationof coffee and donuts?

a) U = 420

b) U = 348

c) U = 324

d) U = 268

Now suppose with your help, Saul has managed to maximize his utility by choosing the optimal consumption bundle. But when he goes back to the coffee and donut shop the following day with the same daily food allowance ($36), he finds the price of a donut is the same as before (i.e., $2) but the price of coffee hasincreased by $1 from $3 to $4per cup.

As to be expected, his utility function remains the same as before, i.e., U = 6X₁X₂.

[Note, a consumer's preferences (represented by the utility function) are not likely to change overnight.]

Question 15:Given Saul's budget and thenew setof prices, how many servings of X₁can he buy if he only chooses to buy X₁(i.e., if he chose X₂to be 0 unit)?

a) X1 = 6

b) X1 = 9

c) X1 = 12

d) X1 = 15

Question 16:Given Saul's budget and the new set of prices, how many servings of X₂can he buy if heonly chooses to buy X₂(i.e., if he chooses X₁to be 0 unit)?

Group of answer choices

a) X2 = 12

b) X2 = 14

c) X2 = 16

d) X2 = 18

Question 17:Can you find Saul's new optimal consumption bundle now?

Hint:It might be possible that you might get the new optimal amounts of one or both goods as fractions or in decimal points. That is okay for the purpose of this even though, in reality, we cannot buy half at a donut at our local Dunkin Donuts.

a) X1 = 9, X2 = 4.5

b) X1 = 2.5, X2 = 9

c) X1 = 4.5, X2 = 9

d) X1 = 9, X2 = 2.5

Question 18:What is Saul'stotal utility levelat his new optimal consumption bundle?

a) U = 342

b) U = 432

c) U = 243

d) U = 423

Question 19:What observation do you make of Saul's response to arisein the price of coffee? How did Saul's response to the price change affect his utility level?

a) Saul incorporated the new information about the rise in coffee' price of coffee to find his new optimal consumption bundle. I found that with the new coffee price, Saul's utility level increased, which means he was able to reach a higher indifference curve than before. This was to be expected.

b) Saul did not respond to the price change because the new information about the drop in the price of coffee is irrelevant to his satisfaction level.

c) Saul incorporated the new information about the rise in coffee price to find his new consumption bundle. I found that with the new coffee price, Saul's utility level decreased (than before), so he ended up on a lower indifference curve after the price change. This was to be expected.

d) I have no idea.

Question 20:In the language of microeconomic theory, what is the name given to Saul's response as a consumer to a rise in the price of coffee?

a) Coffee effect

b) Income Effect

c) Substitution Effect

d) Price Effect