# Chapter 3 Consumer Behavior

Size: px
Start display at page:

Transcription

1 Chapter 3 Consumer Behavior Read Pindyck and Rubinfeld (2013), Chapter 3 Microeconomics, 8 h Edition by R.S. Pindyck and D.L. Rubinfeld Adapted by Chairat Aemkulwat for Econ I: /29/2015 CHAPTER 3 OUTLINE 3.1 Consumer Preferences 3.2 Budget Constraints 3.3 Consumer Choice 3.4 Revealed Preference 3.5 Marginal Utility and Consumer Choice 2

2 Consumer Behavior theory of consumer behavior Description of how consumers allocate incomes among different goods and services to maximize their well-being. Consumer behavior is best understood in three distinct steps: 1. Consumer preferences 2. Budget constraints 3. Consumer choices Consumer Preferences Market Baskets market basket (or bundle) goods. List with specific quantities of one or more To explain the theory of consumer behavior, we will ask whether consumers prefer one market basket to another. 4

5 3.1 CONSUMER PREFERENCES Indifference Maps indifference map Graph containing a set of indifference curves showing the market baskets among which a consumer is indifferent. Figure 3.3 An Indifference Map An indifference map is a set of indifference curves that describes a person's preferences. Any market basket on indifference curve U 3, such as basket A, is preferred to any basket on curve U 2 (e.g., basket B), which in turn is preferred to any basket on U 1, such as D CONSUMER PREFERENCES Indifference Maps Figure 3.4 Indifference Curves Cannot Intersect If indifference curves U 1 and U 2 intersect, one of the assumptions of consumer theory is violated. According to this diagram, the consumer should be indifferent among market baskets A, B, and D. Yet B should be preferred to D because B has more of both goods 10

6 3.1 CONSUMER PREFERENCES The Marginal Rate of Substitution marginal rate of substitution Maximum amount of a good that a consumer is willing to give up in order to obtain one additional unit of another good. Figure 3.5 The Marginal Rate of Substitution The magnitude of the slope of an indifference curve measures the consumer s marginal rate of substitution (MRS) between two goods. In this figure, the MRS between clothing (C) and food (F) falls from 6 (between A and B) to 4 (between B and D) to 2 (between D and E) to 1 (between E and G). Observe that the MRS falls as we move down the indifference curve 11 The Marginal Rate of Substitution 4. Diminishing marginal rate of substitution: The decline in the MRS reflects our fourth assumption regarding consumer preferences: a diminishing marginal rate of substitution CONVEXITY When the MRS diminishes along an indifference curve, the curve is convex. The term convex means that the slope of the indifference increases (i.e., less negative) as we move down the curve. 12

7 3.1 CONSUMER PREFERENCES Perfect Substitutes and Perfect Complements perfect substitutes Two goods for which the marginal rate of substitution of one for the other is a constant. perfect complements Two goods for which the MRS is zero or infinite; the indifference curves are shaped as right angles. Bads bad Good for which less is preferred rather than more CONSUMER PREFERENCES Perfect Substitutes and Perfect Complements Figure 3.6 Perfect Substitutes and Perfect Complements In (a), Bob views orange juice and apple juice as perfect substitutes: He is always indifferent between a glass of one and a glass of the other. In (b), Jane views left shoes and right shoes as perfect complements: An additional left shoe gives her no extra satisfaction unless she also obtains the matching right shoe. 14

8 EXAMPLE 3.1 DESIGNING NEW AUTOMOBILES (I) Preferences for automobile attributes can be described by indifference curves. Each curve shows the combination of acceleration and interior space that give the same satisfaction. FIGURE 3.7 PREFERENCES FOR AUTOMOBILE ATTRIBUTES Owners of Ford Mustang coupes (a) are willing to give up considerable interior space for additional acceleration. The opposite is true for owners of Ford Explorers. They prefer interior space to acceleration (b). 3.1 CONSUMER PREFERENCES Utility and Utility Functions utility Numerical score representing the satisfaction that a consumer gets from a given market basket. utility function Figure 3.8 market baskets. Utility Functions and Indifference Curves A utility function can be represented by a set of indifference curves, each with a numerical indicator. Formula that assigns a level of utility to individual u(f,c) = FC This figure shows three indifference curves (with utility levels of 25, 50, and 100, respectively) associated with the utility function: u(f,c) = FC 16

9 ORDINAL VERSUS CARDINAL UTILITY ordinal utility function Utility function that generates a ranking of market baskets in order of most to least preferred. cardinal utility function Utility function describing by how much one market basket is preferred to another. EXAMPLE 3.2 CAN MONEY BUY HAPPINESS? FIGURE 3.9 INCOME AND HAPPINESS A cross-country comparison shows that individuals living in countries with higher GDP per capita are on average happier than those living in countries with lower percapita GDP. 2. Draw indifference curves that represent the following individuals preferences for hamburgers and soft drinks. Indicate the direction in which the individuals satisfaction (or utility) is increasing. a) Joe has convex preferences and dislikes both hamburgers and soft drinks. b) Jane loves hamburgers and dislikes soft drinks. If she is served a soft drink, she will pour it down the drain rather than drink it. c) Bob loves hamburgers and dislikes soft drinks. If he is served a soft drink, he will drink it to be polite. d) Molly loves hamburgers and soft drinks, but insists on consuming exactly one soft drink for every two hamburgers that she eats. e) Bill likes hamburgers, but neither likes nor dislikes soft drinks. f) Mary always gets twice as much satisfaction from an extra hamburger as she does from an extra soft drink. 18

10 3.2 budget constraints of limited incomes. Budget Constraints Constraints that consumers face as a result The Budget Line budget line All combinations of goods for which the total amount of money spent is equal to income. P F F P C I (3.1) C TABLE 3.2 MARKET BASKETS AND THE BUDGET LINE MARKET BASKET FOOD (F) CLOTHING (C) TOTAL SPENDING A 0 40 \$80 B \$80 D \$80 E \$80 G 80 0 \$80 Market baskets associated with the budget line F + 2C = \$ BUDGET CONSTRAINTS The Budget Line Figure 3.10 A Budget Line A budget line describes the combinations of goods that can be purchased given the consumer s income and the prices of the goods. Line AG (which passes through points B, D, and E) shows the budget associated with an income of \$80, a price of food of P F = \$1 per unit, and a price of clothing of P C = \$2 per unit. The slope of the budget line (measured between points B and D) is P F /P C = 10/20 = 1/2. 20

11 3.2 BUDGET CONSTRAINTS The Effects of Changes in Income and Prices Figure 3.11 Effects of a Change in Income on the Budget Line Income changes A change in income (with prices unchanged) causes the budget line to shift parallel to the original line (L 1 ). When the income of \$80 (on L 1 ) is increased to \$160, the budget line shifts outward to L 2. If the income falls to \$40, the line shifts inward to L BUDGET CONSTRAINTS The Effects of Changes in Income and Prices Figure 3.12 Effects of a Change in Price on the Budget Line Price changes A change in the price of one good (with income unchanged) causes the budget line to rotate about one intercept. When the price of food falls from \$1.00 to \$0.50, the budget line rotates outward from L 1 to L 2. However, when the price increases from \$1.00 to \$2.00, the line rotates inward from L1 to L 3. 22

12 3.3 Consumer Choice The maximizing market basket must satisfy two conditions: 1. It must be located on the budget line. 2. It must give the consumer the most preferred combination of goods and services. 23 FIGURE 3.13 MAXIMIZING CONSUMER SATISFACTION A consumer maximizes satisfaction by choosing market basket A. At this point, the budget line and indifference curve U 2 are tangent. No higher level of satisfaction (e.g., market basket D) can be attained. At A, the point of maximization, the MRS between the two goods equals the price ratio. At B, however, because the MRS [ ( 10/10) = 1] is greater than the price ratio (1/2), satisfaction is not maximized.

13 3.3 CONSUMER CHOICE Satisfaction is maximized (given the budget constraint) at the point where MRS = P F /P C. marginal benefit Benefit from the consumption of one additional unit of a good. marginal cost Cost of one additional unit of a good. Using these definitions, we can then say that satisfaction is maximized when the marginal benefit the benefit associated with the consumption of one additional unit of food is equal to the marginal cost the cost of the additional unit of food. The marginal benefit is measured by the MRS. 25 EXAMPLE 3.3 DESIGNING NEW AUTOMOBILES (II) Different preferences of consumer groups for automobiles can affect their purchasing decisions. Following up on Example 3.1, we consider two groups of consumers planning to buy new cars. FIGURE 3.14 CONSUMER CHOICE OF AUTOMOBILE ATTRIBUTES The consumers in (a) are willing to trade off a considerable amount of interior space for some additional acceleration. Given a budget constraint, they will choose a car that emphasizes acceleration. The opposite is true for consumers in (b).

14 3.3 CONSUMER CHOICE Corner Solutions corner solution Situation in which the marginal rate of substitution for one good in a chosen market basket is not equal to the slope of the budget line. Figure 3.15 A Corner Solution When a corner solution arises, the consumer maximizes satisfaction by consuming only one of the two goods. Given budget line AB, the highest level of satisfaction is achieved at B on indifference curve U 1, where the MRS (of ice cream for frozen yogurt) is greater than the ratio of the price of ice cream to the price of frozen yogurt. MRS > P IC /P Y CONSUMER CHOICE Figure 3.16 A College Trust Fund When given a college trust fund that must be spent on education, the student moves from A to B, a corner solution. If, however, the trust fund could be spent on other consumption as well as education, the student would be better off at C. 28

15 15. Jane receives utility from days spent traveling on vacation domestically (D) and days spent traveling on vacation in a foreign country (F), as given by the utility function U(D,F) = 10DF. In addition, the price of a day spent traveling domestically is \$100, the price of a day spent traveling in a foreign country is \$400, and Jane s annual travel budget is \$4000. a) Illustrate the indifference curve associated with a utility of 800 and the indifference curve associated with a utility of b) Graph Jane s budget line on the same graph. c) Can Jane afford any of the bundles that give her a utility of 800? What about a utility of 1200? d) Find Jane s utility maximizing choice of days spent traveling domestically and days spent in a foreign country. 29 a) Illustrate the indifference curve associated with a utility of 800 and the indifference curve associated with a utility of U(D,F) = 10DF 800 = 10*30* = 10*5*16 I = P D *D+P F *F 4000 = 100*D+400*F U(D,F) = 10DF 1200 = 10*30* = 10*5*24 30

17 FIGURE 3.19 REVEALED PREFERENCE: FOUR BUDGET LINES Facing budget line l 3, the individual chooses E, which is revealed to be preferred to A (because A could have been chosen). Likewise, facing line l 4, the individual chooses G, which is also revealed to be preferred to A. Whereas A is preferred to all market baskets in the greenshaded area, all market baskets in the pink-shaded area are preferred to A. EXAMPLE 3.6 REVEALED PREFERENCE FOR RECREATION FIGURE 3.20 REVEALED PREFERENCE FOR RECREATION When facing budget line l 1, an individual chooses to use a health club for 10 hours per week at point A. When the fees are altered, she faces budget line l 2. She is then made better off because market basket A can still be purchased, as can market basket B, which lies on a higher indifference curve.

18 3.5 Marginal Utility and Consumer Choice marginal utility (MU) Additional satisfaction obtained from consuming one additional unit of a good. diminishing marginal utility Principle that as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility. ( C / F) MU 0 MU ( F) MU ( C) F F / MU C C MRS MU F / MU C MRS P F / P C (3.5) (3.6) MU F / MU C P / P F C or MU F / P MU / P F C C (3.7) equal marginal principle Principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods. EXAMPLE 3.7 MARGINAL UTILITY AND HAPPINESS What, if anything, does research on consumer satisfaction tell us about the relationship between happiness and the concepts of utility and marginal utility? FIGURE 3.21 MARGINAL UTILITY AND HAPPINESS A comparison of mean levels of satisfaction with life across income classes in the United States shows that happiness increases with income, but at a diminishing rate.

19 Rationing FIGURE 3.22 INEFFICIENCY OF GASOLINE RATIONING When a good is rationed, less is available than consumers would like to buy. Consumers may be worse off. Without gasoline rationing, up to 20,000 gallons of gasoline are available for consumption (at point B). The consumer chooses point C on indifference curve U 2, consuming 5000 gallons of gasoline. However, with a limit of 2000 gallons of gasoline under rationing, the consumer moves to D on the lower indifference curve U 1. FIGURE 3.23 COMPARING GASOLINE RATIONING TO THE FREE MARKET Some consumers will be worse off, but others may be better off with rationing. With rationing and a gasoline price of \$1.00, she buys the maximum allowable 2000 gallons per year, putting her on indifference curve U 1. Had the competitive market price been \$2.00 per gallon with no rationing, she would have chosen point F, which lies below indifference curve U 1. However, had the price of gasoline been only \$1.33 per gallon, she would have chosen point G, which lies above indifference curve U 1.

20 9. Upon merging with the West German economy, East German consumers indicated a preference for Mercedes Benz automobiles over Volkswagens. However, when they converted their savings into deutsche marks, they flocked to Volkswagen dealerships. How can you explain this apparent paradox? Draw indifference curves that represent the following individuals preferences for hamburgers and soft drinks. Indicate the direction in which the individuals satisfaction (or utility) is increasing. a) Joe has convex preferences and dislikes both hamburgers and soft drinks. b) Jane loves hamburgers and dislikes soft drinks. If she is served a soft drink, she will pour it down the drain rather than drink it. c) Bob loves hamburgers and dislikes soft drinks. If he is served a soft drink, he will drink it to be polite. d) Molly loves hamburgers and soft drinks, but insists on consuming exactly one soft drink for every two hamburgers that she eats. e) Bill likes hamburgers, but neither likes nor dislikes soft drinks. f) Mary always gets twice as much satisfaction from an extra hamburger as she does from an extra soft drink. 40

21 6. Suppose that Jones and Smith have each decided to allocate \$1000 per year to an entertainment budget in the form of hockey games or rock concerts. They both like hockey games and rock concerts and will choose to consume positive quantities of both goods. However, they differ substantially in their preferences for these two forms of entertainment. Jones prefers hockey games to rock concerts, while Smith prefers rock concerts to hockey games. a) Draw a set of indifference curves for Jones and a second set for Smith. b) Using the concept of marginal rate of substitution, explain why the two sets of curves are different from each other Anne has a job that requires her to travel three out of every four weeks. She has an annual travel budget and can travel either by train or by plane. The airline on which she typically flies has a frequent traveler program that reduces the cost of her tickets according to the number of miles she has flown in a given year. When she reaches 25,000 miles, the airline will reduce the price of her tickets by 25 percent for the remainder of the year. When she reaches 50,000 miles, the airline will reduce the price by 50 percent for the remainder of the year. Graph Anne s budget line, with train miles on the vertical axis and plane miles on the horizontal axis. 42

22 CHAPTER 3 RECAP Consumer Preferences Budget Constraints Consumer Choice Revealed Preference Marginal Utility and Consumer Choice 43

### CHAPTER 3 CONSUMER BEHAVIOR

CHAPTER 3 CONSUMER BEHAVIOR EXERCISES 2. Draw the indifference curves for the following individuals preferences for two goods: hamburgers and beer. a. Al likes beer but hates hamburgers. He always prefers

### The fundamental question in economics is 2. Consumer Preferences

A Theory of Consumer Behavior Preliminaries 1. Introduction The fundamental question in economics is 2. Consumer Preferences Given limited resources, how are goods and service allocated? 1 3. Indifference

### Indifference Curves: An Example (pp. 65-79) 2005 Pearson Education, Inc.

Indifference Curves: An Example (pp. 65-79) Market Basket A B D E G H Units of Food 20 10 40 30 10 10 Units of Clothing 30 50 20 40 20 40 Chapter 3 1 Indifference Curves: An Example (pp. 65-79) Graph the

### Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd )

(Refer Slide Time: 00:28) Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay Lecture - 13 Consumer Behaviour (Contd ) We will continue our discussion

### 1. Briefly explain what an indifference curve is and how it can be graphically derived.

Chapter 2: Consumer Choice Short Answer Questions 1. Briefly explain what an indifference curve is and how it can be graphically derived. Answer: An indifference curve shows the set of consumption bundles

### Figure 4-1 Price Quantity Quantity Per Pair Demanded Supplied \$ 2 18 3 \$ 4 14 4 \$ 6 10 5 \$ 8 6 6 \$10 2 8

Econ 101 Summer 2005 In-class Assignment 2 & HW3 MULTIPLE CHOICE 1. A government-imposed price ceiling set below the market's equilibrium price for a good will produce an excess supply of the good. a.

### CHAPTER 4 Consumer Choice

CHAPTER 4 Consumer Choice CHAPTER OUTLINE 4.1 Preferences Properties of Consumer Preferences Preference Maps 4.2 Utility Utility Function Ordinal Preference Utility and Indifference Curves Utility and

### Chapter 4 Online Appendix: The Mathematics of Utility Functions

Chapter 4 Online Appendix: The Mathematics of Utility Functions We saw in the text that utility functions and indifference curves are different ways to represent a consumer s preferences. Calculus can

### Demand. Lecture 3. August 2015. Reading: Perlo Chapter 4 1 / 58

Demand Lecture 3 Reading: Perlo Chapter 4 August 2015 1 / 58 Introduction We saw the demand curve in chapter 2. We learned about consumer decision making in chapter 3. Now we bridge the gap between the

### UTILITY AND DEMAND. Chapter. Household Consumption Choices

Chapter 7 UTILITY AND DEMAND Household Consumption Choices Topic: Consumption Possibilities 1) The level of utility a consumer can achieve is limited by A) prices only. B) income only. C) the consumer

### CONSUMER PREFERENCES THE THEORY OF THE CONSUMER

CONSUMER PREFERENCES The underlying foundation of demand, therefore, is a model of how consumers behave. The individual consumer has a set of preferences and values whose determination are outside the

### DEMAND FORECASTING. Demand. Law of Demand. Definition of Law of Demand

DEMAND FORECASTING http://www.tutorialspoint.com/managerial_economics/demand_forecasting.htm Copyright tutorialspoint.com Demand Demand is a widely used term, and in common is considered synonymous with

### Chapter 4 Individual and Market Demand

Chapter 4 Individual and Market Demand Questions for Review 1. Explain the difference between each of the following terms: a. a price consumption curve and a demand curve The price consumption curve (PCC)

### Consumers face constraints on their choices because they have limited incomes.

Consumer Choice: the Demand Side of the Market Consumers face constraints on their choices because they have limited incomes. Wealthy and poor individuals have limited budgets relative to their desires.

### Price Elasticity of Supply; Consumer Preferences

1 Price Elasticity of Supply 1 14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen September 12, 2007 Lecture 4 Price Elasticity of Supply; Consumer Preferences Outline 1. Chap 2: Elasticity -

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chapter 4 - Elasticity - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The slope of a demand curve depends on A) the units used

### 3. George W. Bush is the current U.S. President. This is an example of a: A. Normative statement B. Positive statement

Econ 3144 Fall 2006 Test 1 Dr. Rupp Name Sign Pledge I have neither given nor received aid on this exam Multiple Choice Questions (3 points each) 1. What you give up to obtain an item is called your A.

### Economics 301 Problem Set 4 5 October 2007

Economics 301 Name Problem Set 4 5 October 2007 Budget Lines and Indifference Curves and the Consumer Optimum 1. Parvez, a pharmacology student, has allocated \$120 per month to spend on paperback novels

### This file includes the answers to the problems at the end of Chapters 1, 2, 3, and 5 and 6.

This file includes the answers to the problems at the end of Chapters 1, 2, 3, and 5 and 6. Chapter One 1. The economic surplus from washing your dirty car is the benefit you receive from doing so (\$6)

### Problem Set #5-Key. Economics 305-Intermediate Microeconomic Theory

Problem Set #5-Key Sonoma State University Economics 305-Intermediate Microeconomic Theory Dr Cuellar (1) Suppose that you are paying your for your own education and that your college tuition is \$200 per

### Preferences. M. Utku Ünver Micro Theory. Boston College. M. Utku Ünver Micro Theory (BC) Preferences 1 / 20

Preferences M. Utku Ünver Micro Theory Boston College M. Utku Ünver Micro Theory (BC) Preferences 1 / 20 Preference Relations Given any two consumption bundles x = (x 1, x 2 ) and y = (y 1, y 2 ), the

### MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.

MERSİN UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATIVE SCİENCES DEPARTMENT OF ECONOMICS MICROECONOMICS MIDTERM EXAM DATE 18.11.2011 TİIE 12:30 STUDENT NAME AND NUMBER MULTIPLE CHOICE. Choose the one

### Elasticity. I. What is Elasticity?

Elasticity I. What is Elasticity? The purpose of this section is to develop some general rules about elasticity, which may them be applied to the four different specific types of elasticity discussed in

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Chapter 11 Perfect Competition - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a

### An increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers.

1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.

### ECN 221 Chapter 5 practice problems This is not due for a grade

ECN 221 Chapter 5 practice problems This is not due for a grade 1. Assume the price of pizza is \$2.00 and the price of Beer is \$1.00 and that at your current levels of consumption, the Marginal Utility

### Microeconomics Sept. 16, 2010 NOTES ON CALCULUS AND UTILITY FUNCTIONS

DUSP 11.203 Frank Levy Microeconomics Sept. 16, 2010 NOTES ON CALCULUS AND UTILITY FUNCTIONS These notes have three purposes: 1) To explain why some simple calculus formulae are useful in understanding

### Economics 100A. Final Exam

Name form number 1 Economics 100A Final Exam Fill in the bubbles on your scantron with your id number (starting from the left side of the box), your name, and the form type. Students who do this successfully

### or, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost:

Chapter 9 Lecture Notes 1 Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing.

### UC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A)

UC Berkeley Haas School of Business Economic Analysis for Business Decisions (EWMBA 201A) The economic agent (PR 3.1-3.4) Standard economics vs. behavioral economics Lectures 1-2 Aug. 15, 2009 Prologue

### 4 ELASTICITY. Chapter. Price Elasticity of Demand. A) more elastic. B) less elastic. C) neither more nor less elastic. D) undefined.

Chapter 4 ELASTICITY Price Elasticity of Demand Topic: The Price Elasticity of Demand 1) The slope of a demand curve depends on A) the units used to measure price and the units used to measure quantity.

### Chapter 10. Consumer Choice and Behavioral Economics

Chapter 10. Consumer Choice and Behavioral Economics Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 202 504 Principles of Microeconomics Utility Utility: the satisfaction people

economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...

### Study Questions for Chapter 9 (Answer Sheet)

DEREE COLLEGE DEPARTMENT OF ECONOMICS EC 1101 PRINCIPLES OF ECONOMICS II FALL SEMESTER 2002 M-W-F 13:00-13:50 Dr. Andreas Kontoleon Office hours: Contact: a.kontoleon@ucl.ac.uk Wednesdays 15:00-17:00 Study

### ANSWER KEY 3 UTILITY FUNCTIONS, THE CONSUMER S PROBLEM, DEMAND CURVES

ANSWER KEY 3 UTILITY FUNCTIONS, THE CONSUMER S PROBLEM, DEMAND CURVES ECON 210 (1) Perfect Substitutes. Suppose that Jack s utility is entirely based on number of hours spent camping (c) and skiing (s).

### Economics 103h Fall l 2012: Review Questions for Midterm 2

Economics 103h Fall l 2012: Review Questions for Midterm 2 Essay/Graphing questions 1, Explain the shape of the budget line. 2. What shifts the budget line and why? Give an example in words and demonstrate

### chapter: Solution Solution The Rational Consumer

S11-S156_Krugman2e_PS_Ch1.qxp 9/16/8 9:21 PM Page S-11 The Rational Consumer chapter: 1 1. For each of the following situations, decide whether Al has increasing, constant, or diminishing marginal utility.

### Notes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation. Jon Bakija

Notes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation Jon Bakija This example shows how to use a budget constraint and indifference curve diagram

### Understanding the Slutsky Decomposition: Substitution & Income Effect

Understanding the Slutsky Decomposition: Substitution & Income Effect age 1 lacement of the Final Bundle when p : Substitute or Complement Goods? egion A egion B egion C BC 2 S When p, BC rotates inwards

### The Central Idea CHAPTER 1 CHAPTER OVERVIEW CHAPTER REVIEW

CHAPTER 1 The Central Idea CHAPTER OVERVIEW Economic interactions involve scarcity and choice. Time and income are limited, and people choose among alternatives every day. In this chapter, we study the

### CHAPTER 7: CONSUMER BEHAVIOR

CHAPTER 7: CONSUMER BEHAVIOR Introduction The consumer is central to a market economy, and understanding how consumers make their purchasing decisions is the key to understanding demand. Chapter 7 explains

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Firms that survive in the long run are usually those that A) remain small. B) strive for the largest

### Chapter 3. The Concept of Elasticity and Consumer and Producer Surplus. Chapter Objectives. Chapter Outline

Chapter 3 The Concept of Elasticity and Consumer and roducer Surplus Chapter Objectives After reading this chapter you should be able to Understand that elasticity, the responsiveness of quantity to changes

### c 2008 Je rey A. Miron We have described the constraints that a consumer faces, i.e., discussed the budget constraint.

Lecture 2b: Utility c 2008 Je rey A. Miron Outline: 1. Introduction 2. Utility: A De nition 3. Monotonic Transformations 4. Cardinal Utility 5. Constructing a Utility Function 6. Examples of Utility Functions

### Supply and Demand Fundamental tool of economic analysis Used to discuss unemployment, value of \$, protection of the environment, etc.

Supply and emand Fundamental tool of economic analysis Used to discuss unemployment, value of \$, protection of the environment, etc. Chapter Outline: (a) emand is the consumer side of the market. (b) Supply

### REVIEW OF MICROECONOMICS

ECO 352 Spring 2010 Precepts Weeks 1, 2 Feb. 1, 8 REVIEW OF MICROECONOMICS Concepts to be reviewed Budget constraint: graphical and algebraic representation Preferences, indifference curves. Utility function

### Elasticity. Ratio of Percentage Changes. Elasticity and Its Application. Price Elasticity of Demand. Price Elasticity of Demand. Elasticity...

Elasticity and Its Application Chapter 5 All rights reserved. Copyright 21 by Harcourt, Inc. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department,

### POTENTIAL OUTPUT and LONG RUN AGGREGATE SUPPLY

POTENTIAL OUTPUT and LONG RUN AGGREGATE SUPPLY Aggregate Supply represents the ability of an economy to produce goods and services. In the Long-run this ability to produce is based on the level of production

### Week 1: Functions and Equations

Week 1: Functions and Equations Goals: Review functions Introduce modeling using linear and quadratic functions Solving equations and systems Suggested Textbook Readings: Chapter 2: 2.1-2.2, and Chapter

ANSWERS TO END-OF-CHAPTER QUESTIONS 9-1 Explain what relationships are shown by (a) the consumption schedule, (b) the saving schedule, (c) the investment-demand curve, and (d) the investment schedule.

### Economics 121b: Intermediate Microeconomics Problem Set 2 1/20/10

Dirk Bergemann Department of Economics Yale University s by Olga Timoshenko Economics 121b: Intermediate Microeconomics Problem Set 2 1/20/10 This problem set is due on Wednesday, 1/27/10. Preliminary

### Demand and Consumer Behavior emand is a model of consumer behavior. It attempts to identify the factors

R. Larry Reynolds Demand and Consumer Behavior R. Larry Reynolds (005) Demand and Consumer Behavior emand is a model of consumer behavior. It attempts to identify the factors D that influence the choices

### Common sense, and the model that we have used, suggest that an increase in p means a decrease in demand, but this is not the only possibility.

Lecture 6: Income and Substitution E ects c 2009 Je rey A. Miron Outline 1. Introduction 2. The Substitution E ect 3. The Income E ect 4. The Sign of the Substitution E ect 5. The Total Change in Demand

### SUPPLY AND DEMAND : HOW MARKETS WORK

SUPPLY AND DEMAND : HOW MARKETS WORK Chapter 4 : The Market Forces of and and demand are the two words that economists use most often. and demand are the forces that make market economies work. Modern

### Tastes and Indifference Curves

Chapter 4 Tastes and Indifference Curves Individuals try to do the best they can given their circumstances. 1 This was our starting point when we introduced the topic of microeconomics in Chapter 1, and

### Choices. Preferences. Indifference Curves. Preference Relations. ECON 370: Microeconomic Theory Summer 2004 Rice University Stanley Gilbert

Choices Preferences ECON 370: Microeconomic Theor Summer 2004 Rice Universit Stanle Gilbert The theor of consumer preferences is based fundamentall on choices The steak dinner or the salad bar Major in

### Practice Problem Set 2 (ANSWERS)

Economics 370 Professor H.J. Schuetze Practice Problem Set 2 (ANSWERS) 1. See the figure below, where the initial budget constraint is given by ACE. After the new legislation is passed, the budget constraint

### Chapter 5 Elasticity of Demand and Supply. These slides supplement the textbook, but should not replace reading the textbook

Chapter 5 Elasticity of Demand and Supply These slides supplement the textbook, but should not replace reading the textbook 1 What is total revenue? Price multiplied by the quantity sold at that price

### 11 PERFECT COMPETITION. Chapter. Competition

Chapter 11 PERFECT COMPETITION Competition Topic: Perfect Competition 1) Perfect competition is an industry with A) a few firms producing identical goods B) a few firms producing goods that differ somewhat

### Chapter 3 Market Demand, Supply, and Elasticity

Chapter 3 Market Demand, Supply, and Elasticity After reading chapter 3, MARKET DEMAND, SUPPLY, AND ELASTICITY, you should be able to: Discuss the Law of Demand and draw a Demand Curve. Distinguish between

### DEMAND AND SUPPLY. Chapter. Markets and Prices. Demand. C) the price of a hot dog minus the price of a hamburger.

Chapter 3 DEMAND AND SUPPLY Markets and Prices Topic: Price and Opportunity Cost 1) A relative price is A) the slope of the demand curve B) the difference between one price and another C) the slope of

### Test 1 10 October 2008. 1. Assume that tea and lemons are complements and that coffee and tea are substitutes.

Eco 301 Name Test 1 10 October 2008 100 points. Please write all answers in ink. Please use pencil and a straight edge to draw graphs. Allocate your time efficiently. 1. Assume that tea and lemons are

### Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization

Lecture 2. Marginal Functions, Average Functions, Elasticity, the Marginal Principle, and Constrained Optimization 2.1. Introduction Suppose that an economic relationship can be described by a real-valued

### ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of May 12 Chapter 1 WRITE [7] Suppose you won \$15 on a Lotto Canada ticket at the local 7-Eleven and decided to spend all the winnings on

### PART A: For each worker, determine that worker's marginal product of labor.

ECON 3310 Homework #4 - Solutions 1: Suppose the following indicates how many units of output y you can produce per hour with different levels of labor input (given your current factory capacity): PART

### 4 THE MARKET FORCES OF SUPPLY AND DEMAND

4 THE MARKET FORCES OF SUPPLY AND DEMAND IN THIS CHAPTER YOU WILL Learn what a competitive market is Examine what determines the demand for a good in a competitive market Chapter Overview Examine what

### BPE_MIC1 Microeconomics 1 Fall Semester 2011

Masaryk University - Brno Department of Economics Faculty of Economics and Administration BPE_MIC1 Microeconomics 1 Fall Semester 2011 Final Exam - 05.12.2011, 9:00-10:30 a.m. Test A Guidelines and Rules:

### I. Introduction to Aggregate Demand/Aggregate Supply Model

University of California-Davis Economics 1B-Intro to Macro Handout 8 TA: Jason Lee Email: jawlee@ucdavis.edu I. Introduction to Aggregate Demand/Aggregate Supply Model In this chapter we develop a model

### Chapter 6 Competitive Markets

Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a

### 1. Supply and demand are the most important concepts in economics.

Page 1 1. Supply and demand are the most important concepts in economics. 2. Markets and Competition a. Market is a group of buyers and sellers of a particular good or service. P. 66. b. These individuals

### Lecture Note 7: Revealed Preference and Consumer Welfare

Lecture Note 7: Revealed Preference and Consumer Welfare David Autor, Massachusetts Institute of Technology 14.03/14.003 Microeconomic Theory and Public Policy, Fall 2010 1 1 Revealed Preference and Consumer

### Problem Set 2: Solutions ECON 301: Intermediate Microeconomics Prof. Marek Weretka. Problem 1 (Marginal Rate of Substitution)

Proble Set 2: Solutions ECON 30: Interediate Microeconoics Prof. Marek Weretka Proble (Marginal Rate of Substitution) (a) For the third colun, recall that by definition MRS(x, x 2 ) = ( ) U x ( U ). x

### Elements of a graph. Click on the links below to jump directly to the relevant section

Click on the links below to jump directly to the relevant section Elements of a graph Linear equations and their graphs What is slope? Slope and y-intercept in the equation of a line Comparing lines on

### Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9

Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 print name on the line above as your signature INSTRUCTIONS: 1. This Exam #2 must be completed within the allocated time (i.e., between

### EC2105, Professor Laury EXAM 2, FORM A (3/13/02)

EC2105, Professor Laury EXAM 2, FORM A (3/13/02) Print Your Name: ID Number: Multiple Choice (32 questions, 2.5 points each; 80 points total). Clearly indicate (by circling) the ONE BEST response to each

### 2Choice Sets and Budget Constraints

S O L U T I O N S 2Choice Sets and Budget Constraints Solutions for Microeconomics: An Intuitive Approach with Calculus (International Ed.) Apart from end-of-chapter exercises provided in the student Study

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

Multiple choice review questions for Midterm 2 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A consumption point inside the budget line A) is

### Where are we? To do today: finish the derivation of the demand curve using indifference curves. Go on then to chapter Production and Cost

Where are we? To do today: finish the derivation of the demand curve using indifference curves Go on then to chapter Production and Cost Utility and indifference curves The point is to find where on the

### Price Theory Lecture 3: Theory of the Consumer

Price Theor Lecture 3: Theor of the Consumer I. Introduction The purpose of this section is to delve deeper into the roots of the demand curve, to see eactl how it results from people s tastes, income,

### The Keynesian Cross. A Fixed Price Level. The Simplest Keynesian-Cross Model: Autonomous Consumption Only

The Keynesian Cross Some instructors like to develop a more detailed macroeconomic model than is presented in the textbook. This supplemental material provides a concise description of the Keynesian-cross

### Answer Key for California State Standards: Algebra I

Algebra I: Symbolic reasoning and calculations with symbols are central in algebra. Through the study of algebra, a student develops an understanding of the symbolic language of mathematics and the sciences.

### Supply and Demand. A market is a group of buyers and sellers of a particular good or service.

Supply and Demand A market is a group of buyers and sellers of a particular good or service. The definition of the good is a matter of judgement: Should different locations entail different goods (and

### I. Introduction to Taxation

University of Pacific-Economics 53 Lecture Notes #17 I. Introduction to Taxation Government plays an important role in most modern economies. In the United States, the role of the government extends from

### Lecture Notes Intermediate Microeconomics. Xu Hu huxu85@tamu.edu Department of Economics, Texas A&M University

Lecture Notes Intermediate Microeconomics Xu Hu huxu85@tamu.edu Department of Economics, Texas A&M University November 12, 2010 2 Contents 1 Introduction 5 1.1 Prologue.......................................

### Market for cream: P 1 P 2 D 1 D 2 Q 2 Q 1. Individual firm: W Market for labor: W, S MRP w 1 w 2 D 1 D 1 D 2 D 2

Factor Markets Problem 1 (APT 93, P2) Two goods, coffee and cream, are complements. Due to a natural disaster in Brazil that drastically reduces the supply of coffee in the world market the price of coffee

### The Cost of Production

The Cost of Production 1. Opportunity Costs 2. Economic Costs versus Accounting Costs 3. All Sorts of Different Kinds of Costs 4. Cost in the Short Run 5. Cost in the Long Run 6. Cost Minimization 7. The

### AK 4 SLUTSKY COMPENSATION

AK 4 SLUTSKY COMPENSATION ECON 210 A. JOSEPH GUSE (1) (a) First calculate the demand at the original price p b = 2 b(p b,m) = 1000 20 5p b b 0 = b(2) = 40 In general m c = m+(p 1 b p0 b )b 0. If the price

### chapter >> Making Decisions Section 2: Making How Much Decisions: The Role of Marginal Analysis

chapter 7 >> Making Decisions Section : Making How Much Decisions: The Role of Marginal Analysis As the story of the two wars at the beginning of this chapter demonstrated, there are two types of decisions:

### How To Calculate Profit Maximization In A Competitive Dairy Firm

Microeconomic FRQ s 2005 1. Bestmilk, a typical profit-maximizing dairy firm, is operating in a constant-cost, perfectly competitive industry that is in long-run equilibrium. a. Draw correctly-labeled

### Deriving Demand Functions - Examples 1

Deriving Demand Functions - Examples 1 What follows are some examples of different preference relations and their respective demand functions. In all the following examples, assume we have two goods x

### Econ 102 Measuring National Income and Prices Solutions

Econ 102 Measuring National Income and Prices Solutions 1. Measurement of National Income and Decomposing GDP This question is designed to see if you understand how Gross Domestic Product (GDP) is measured.

### ELASTICITY Microeconomics in Context (Goodwin, et al.), 3 rd Edition

Chapter 4 ELASTICITY Microeconomics in Context (Goodwin, et al.), 3 rd Edition Chapter Overview This chapter continues dealing with the demand and supply curves we learned about in Chapter 3. You will

### Problem Set #3 Answer Key

Problem Set #3 Answer Key Economics 305: Macroeconomic Theory Spring 2007 1 Chapter 4, Problem #2 a) To specify an indifference curve, we hold utility constant at ū. Next, rearrange in the form: C = ū

### CHAPTER 1: LIMITS, ALTERNATIVES, AND CHOICES

CHAPTER 1: LIMITS, ALTERNATIVES, AND CHOICES Introduction At the heart of the study of economics is the simple but very real prospect that we cannot have it all. We have too few resources to meet all of

### LECTURE NOTES ON MACROECONOMIC PRINCIPLES

LECTURE NOTES ON MACROECONOMIC PRINCIPLES Peter Ireland Department of Economics Boston College peter.ireland@bc.edu http://www2.bc.edu/peter-ireland/ec132.html Copyright (c) 2013 by Peter Ireland. Redistribution

### Introductory Notes on Demand Theory

Introductory Notes on Demand Theory (The Theory of Consumer Behavior, or Consumer Choice) This brief introduction to demand theory is a preview of the first part of Econ 501A, but it also serves as a prototype

### Homework #5: Answers. b. How can land rents as well as total wages be shown in such a diagram?

Homework #5: Answers Text questions, hapter 6, problems 1-4. Note that in all of these questions, the convention in the text, whereby production of food uses land and labor, and clothing uses capital and