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CH 03
CH 03
3
Consumer
Behavior
Prepared by:
Fernando & Yvonn Quijano
Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall • Microeconomics • Pindyck/Rubinfeld, 7e.
CHAPTER 3 OUTLINE
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Consumer Behavior
1. Consumer preferences
Chapter 3: Consumer Behavior
2. Budget constraints
3. Consumer choices
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3.1 CONSUMER PREFERENCES
Market Baskets
● market basket (or bundle) List with specific quantities
of one or more goods.
A 20 30
B 10 50
Chapter 3: Consumer Behavior
D 40 20
E 30 40
G 10 20
H 10 40
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3.1 CONSUMER PREFERENCES
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3.1 CONSUMER PREFERENCES
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3.1 CONSUMER PREFERENCES
Indifference Curves
Figure 3.1
clearly preferred to A.
However, A cannot be compared
with B, D, or H without additional
information.
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3.1 CONSUMER PREFERENCES
Indifference Curves
● indifference curve Curve representing all combinations of market
baskets that provide a consumer with the same level of satisfaction.
Figure 3.2
An Indifference Curve
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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
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3.1 CONSUMER PREFERENCES
Indifference Maps
Figure 3.4
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3.1 CONSUMER PREFERENCES
represented by a set of
indifference curves, each
with a numerical
indicator.
This figure shows three
indifference curves (with
utility levels of 25, 50,
and 100, respectively)
associated with the utility
function FC.
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3.1 CONSUMER PREFERENCES
Figure 3.9
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 per-capita
GDP.
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3.1 CONSUMER PREFERENCES
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3.1 CONSUMER PREFERENCES
angles.
Bads
● bad Good for which less is preferred rather than more.
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3.1 CONSUMER PREFERENCES
In (a), Bob views orange juice and In (b), Jane views left shoes and
apple juice as perfect substitutes: right shoes as perfect complements:
He is always indifferent between a An additional left shoe gives her no
glass of one and a glass of the extra satisfaction unless she also
other. obtains the matching right shoe.
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3.1 CONSUMER PREFERENCES
Figure 3.7
Preferences for Automobile Attributes
Owners of Ford Mustang coupes (a) are The opposite is true for owners of
willing to give up considerable interior Ford Explorers (b). They prefer
space for additional acceleration. interior space to acceleration.
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3.2 BUDGET CONSTRAINTS
● budget constraints Constraints that consumers face
as a result of limited incomes.
The Budget Line
● budget line All combinations of goods for which the total
amount of money spent is equal to income.
PF F PCC I (3.1)
A Budget Line
C ( I / PC ) ( PF / PC ) F (3.2)
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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
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3.2 BUDGET CONSTRAINTS
The Effects of Changes in Income and Prices
Figure 3.12
Effects of a Change in Price on the
Budget Line
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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.
Figure 3.13
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3.3 CONSUMER CHOICE
MRS PF / PC (3.3)
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3.3 CONSUMER CHOICE
Figure 3.14
Consumer Choice of Automobile Attributes
Chapter 3: Consumer Behavior
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).
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3.3 CONSUMER CHOICE
Corner Solutions
● corner solution Situation in which the marginal rate of
substitution of one good for another in a chosen market
basket is not equal to the slope of the budget line.
Figure 3.15
A Corner Solution
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3.4 REVEALED PREFERENCE
If a consumer chooses one market basket over another, and if
the chosen market basket is at least as expensive as the
alternative, then the consumer must prefer the chosen market
basket.
Figure 3.17
Revealed Preference:
Two Budget Lines
If an individual facing budget line l1
chose market basket A rather than
market basket B, A is revealed to be
preferred to B.
Chapter 3: Consumer Behavior
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3.4 REVEALED PREFERENCE
Figure 3.18
Revealed Preference:
Four Budget Lines
Facing budget line l3 the
individual chooses E, which is
revealed to be preferred to A
(because A could have been
chosen).
Likewise, facing line l4, the
Chapter 3: Consumer Behavior
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3.4 REVEALED PREFERENCE
Figure 3.19
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3.5 MARGINAL UTILITY AND CONSUMER CHOICE
F C (3.5)
MRS P / P (3.6)
F C
MU / MU P / P
F C F C
MU / P MU / P (3.7)
F F C C
● equal marginal principle Principle that utility is maximized
when the consumer has equalized the marginal utility per dollar of
expenditure across all goods.
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3.5 MARGINAL UTILITY AND CONSUMER CHOICE
Figure 3.20
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.
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3.5 MARGINAL UTILITY AND CONSUMER CHOICE
Figure 3.21
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
Chapter 3: Consumer Behavior
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3.6 COST-OF-LIVING INDEXES
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3.6 COST-OF-LIVING INDEXES
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3.6 COST-OF-LIVING INDEXES
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3.6 COST-OF-LIVING INDEXES
Laspeyres Index
● Laspeyres price index Amount of money at current year
prices that an individual requires to purchase a bundle of goods
and services chosen in a base year divided by the cost of
purchasing the same bundle at base-year prices.
Comparing Ideal Cost-of-Living and Laspeyres Indexes
The Laspeyres index overcompensates Rachel for the higher
cost of living, and the Laspeyres cost-of-living index is, therefore,
greater than the ideal cost-of-living index.
Chapter 3: Consumer Behavior
Paasche Index
● Paasche index Amount of money at current-year prices that
an individual requires to purchase a current bundle of goods and
services divided by the cost of purchasing the same bundle in a
base year.
Comparing the Laspeyres and Paasche Indexes Just as the
Laspeyres index will overstate the ideal cost of living, the
Paasche will understate it because it assumes that the individual
will buy the current-year bundle in the base period.
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