microeconomics pyndick 6th ed

1. Chapter 3 Consumer Behavior

15. Consumer Preferences Food (units per week) 10 20 30 40 10 20 30 40 Clothing (units per week) 50 The consumer prefers A to all combinations in the blue box, while all those in the pink box are preferred to A. G A E H B D

21. Consumer Preferences Food (units per week) Clothing (units per week) U 2 U 3 U 1 A B D Market basket A is preferred to B. Market basket B is preferred to D.

22. Consumer Preferences Food (units per week) Clothing (units per week) Indifference Curves Cannot Cross U 1 U 2 A D B The consumer should be indifferent between A , B and D . However, B contains more of both goods than D .

23. Consumer Preferences Food (units per week) Clothing (units per week) 2 3 4 5 1 2 4 6 8 10 12 14 16 Question : Does this relation hold for giving up food to get clothing? A B D E G -1 -6 1 1 -4 -2 1 1 Observation: The amount of clothing given up for a unit of food decreases from 6 to 1

25. Consumer Preferences Food (units per week) Clothing (units per week) 2 3 4 5 1 2 4 6 8 10 12 14 16 A B D E G -6 1 1 1 1 -4 -2 -1 MRS = 6 MRS = 2

31. Consumer Preferences Orange Juice (glasses) Apple Juice (glasses) 2 3 4 1 1 2 3 4 0 Perfect Substitutes

32. Consumer Preferences Right Shoes Left Shoes 2 3 4 1 1 2 3 4 0 Perfect Complements

37. Consumer Preferences Styling Performance Consumer Preference A : High MRS These consumers are willing to give up considerable styling for additional performance

38. Consumer Preferences Styling Performance Consumer Preference B: Low MRS These consumers are willing to give up considerable performance for additional styling

45. Consumer Preferences Food (units per week) 10 15 5 5 10 15 0 Clothing (units per week ) Utility Functions & Indifference Curves U 1 = 25 U 2 = 50 (Preferred to U 1 ) U 3 = 100 (Preferred to U 2 ) A B C Assume: U = FC Market Basket U = FC C 25 = 2.5(10) A 25 = 5(5) B 25 = 10(2.5)

53. Budget Constraints ( I/P C ) = 40 Food (units per week) 40 60 80 = ( I/P F ) 20 10 20 30 0 Clothing (units per week ) Pc = $2 P f = $1 I = $80 Budget Line F + 2 C = $80 10 20 A B D E G

59. Budget Constraints Food (units per week) Clothing (units per week) 80 120 160 40 20 40 60 80 0 A increase in income shifts the budget line outward ( I = $160) L 2 ( I = $80) L 1 L 3 ( I = $40) A decrease in income shifts the budget line inward

62. Budget Constraints Food (units per week) Clothing (units per week) 80 120 160 40 40 ( P F = 1) L 1 An increase in the price of food to $2.00 changes the slope of the budget line and rotates it inward. L 3 ( P F = 2) ( P F = 1/2) L 2 A decrease in the price of food to $.50 changes the slope of the budget line and rotates it outward.

72. Consumer Choice Food (units per week) Clothing (units per week) 40 80 20 20 30 40 0 U 1 B Budget Line Pc = $2 P f = $1 I = $80 Point B does not maximize satisfaction because the MRS (-(-10/10) = 1 is greater than the price ratio (1/2). -10 C +10 F

73. Consumer Choice Pc = $2 P f = $1 I = $80 Food (units per week) Clothing (units per week) 40 80 20 20 30 40 0 Budget Line U 3 D Market basket D cannot be attained given the current budget constraint.

74. Consumer Choice Pc = $2 P f = $1 I = $80 Food (units per week) Clothing (units per week) 40 80 20 20 30 40 0 U 2 Budget Line A At market basket A the budget line and the indifference curve are tangent and no higher level of satisfaction can be attained. At A: MRS =P f /P c = .5

77. Designing New Automobiles (II) Styling Performance $10,000 $10,000 $3,000 $7,000 These consumers are willing to trade off a considerable amount of styling for some additional performance

78. Designing New Automobiles (II) Styling $10,000 $10,000 Performance $3,000 These consumers are willing to trade off a considerable amount of performance for some additional styling $7,000

85. A Corner Solution Ice Cream (cup/month) Frozen Yogurt (cups monthly) B A U 2 U 3 U 1 A corner solution exists at point B.

91. Consumer Choice Education ($) Other Consumption ($) A College Trust Fund The trust fund shifts the budget line P Q U 2 A U 1 A: Consumption before the trust fund B B: Requirement that the trust fund must be spent on education C U 3 C: If the trust could be spent on other goods

93. Revealed Preferences-- Two Budget Lines D l 1 A I 1 : Chose A over B A is revealed preferred to B l 2 : Choose B over D B is revealed preferred to D Food (units per month) Clothing (units per month) l 2 B

94. Revealed Preferences-- Two Budget Lines Food (units per month) Clothing (units per month) B is preferred to all market baskets in the green area l 2 B l 1 D A All market baskets in the pink shaded area are preferred to A.

95. Revealed Preferences-- Four Budget Lines Food (units per month) Clothing (units per month) All market baskets in the pink area preferred to A l 1 l 2 l 3 l 4 A: preferred to all market baskets in the green area E B A G I 3 : E revealed preferred to A I 4 : G revealed preferred to A

111. Marginal Utility and Consumer Choice Gasoline (gallons per year) Spending on other goods ($) 20,000 B 20,000 A 5,000 U 1 C 15,000 2,000 D With a limit of 2,000 gallons, the consumer moves to a lower indifference curve (lower level of utility). 18,000 U 2

116. Cost-of-Living Indexes Rachel’ Expenditure for Equal Utility $1,260 = 300 lbs. of food x $2.20/lb. + 6 books x $100/book Sarah’ Expenditure $500 = 100 lbs. of food x $2.00/lb. + 15 books x $20/book

118. Cost-of-Living Indexes Food (lb./quarter) Books (per quarter) 450 25 20 15 10 5 0 600 50 100 200 250 300 350 400 550 500 For Rachel to achieve the same level of utility as Sarah, with the higher prices, her budget must be sufficient to allow her to consume the bundle shown by point B. l 2 B l 1 U 1 A

124. Cost-of-Living Indexes l 2 Food (lb./quarter) Books (per quarter) 450 25 20 15 10 5 0 600 50 100 200 250 300 350 400 550 500 Using the Laspeyres index results in the budget line shifting up from I 2 to I 3 . l 3 B l 1 U 1 A

144. End of Chapter 3 Consumer Behavior