Self-study – Chapter 21

Môn học: Kinh tế vi mô

Ca học: thứ 7_tiết 7-9
Thành viên:
- Trần Gia Hân – 21DH480674
- Hoàng Nguyễn Kiều Diễm – 20DH480478
- Phan Thị Nhã Nhi – 21DH485094
- Trương Ngọc Quyên – 21DH484069
- Nguyễn Thị Việt Ngân – 21DH123225
- Lê Minh Hiền – 21DH480699
- Đinh Thị Phương Đài – 21DH122382 (bảo lưu)

1. How does the budget constraint represent the choices a consumer can
afford?

The graph in Figure 1 illustrates the consumption bundles that the consumer
can choose. The vertical axis measures the number of liters of Pepsi, and the
horizontal axis measures the number of pizzas. At point A, the consumer buys
no Pepsi and consumes 100 pizzas. At point B, the consumer buys no pizza and
consumes 500 liters of Pepsi. The consumer buys 50 pizzas and 250 liters of
Pepsi at point C. Point C, which is exactly at the middle of the line from A to
B, is the point at which the consumer spends an equal amount ($500) on pizza
and Pepsi. All the points on the line from A to B are possible. This line, called
the budget constraint, shows the consumption bundles that a consumer can
afford.
In this case, it shows the trade-off between pizza and Pepsi that the
consumer faces. The slope of the budget constraint measures the rate at which
the consumer can trade one good for the other. From point A to point B, the
vertical distance is 500 liters, and the horizontal distance is 100 pizzas. Thus,
the slope is 5 liters per pizza. A pizza costs five times as much as a liter of
Pepsi, so the opportunity cost of a pizza is 5 liters of Pepsi. The budget
constraint's slope of 5 reflects the trade-off the market is offering the consumer:
1 pizza for 5 liters of Pepsi.

2. How do indifference curves represent the consumer’s preferences?

By seeing which point is on the higher indifference curve, we can use the
set of indifference curves to rank any combination of goods.
- Higher indifference curves are preferred to lower ones. People usually
prefer to consume more rather than less.
- Indifference curves slope downward. The slope of an indifference curve
reflects the rate at which a consumer is willing to substitute one good
for the other.
- Indifference curves are bowed inward. The slope of an indifference
curve is the marginal rate of substitution – the rate at which the
consumer is willing to trade off one good for the other.
- The bowed shape of the indifference curve reflects the consumer's
greater willingness to give up a good that she already has in abundance.
- The shape of an indifference curve reveals the consumer's willingness
to trade one good for the other. When the goods are easy to substitute
for each other, the indifference curves are less bowed; when the goods
are hard to substitute, the indifference curves are very bowed.
3. What determines how a consumer divides her resources between two
goods?
There are several factors that can determine how a consumer divides her
resources between two goods, including:
- The prices of the two goods: If one good is more expensive, the
consumer may allocate more resources towards the cheaper good to
maximize utility.
- The income of the consumer: The higher the income of the consumer,
the more resources she has available to allocate towards the two goods.
- The preferences of the consumer: The consumer's subjective tastes and
preferences for the two goods can strongly influence how she divides
her resources between them.
- The availability of substitutes: If there are good substitutes for one of
the goods, the consumer may choose to allocate fewer resources
towards that good in favor of the substitute. 
- The relative quality of the two goods: If one of the goods is perceived to
be of higher quality than the other, the consumer may choose to allocate
more resources towards the higher quality good. 
Overall, the consumer's decision on how to divide her resources between
two goods is influenced by a combination of these factors and others such as
advertising, social norms, and cultural factors.

4. How does the theory of consumer choice explain decisions such as how
much a consumer saves, or how much labor she supplies?
Budget limitations and indifference curves are not used to guide
people's spending decisions. Nonetheless, given their limited resources,
individuals attempt to make decisions that will maximize their enjoyment. The
idea presented in this chapter is merely meant to serve as a metaphor for
consumers’ choices. It serves as the foundation for more complex economic
analysis and describes consumer behavior in a variety of circumstances quite
well.
 Given her money and the pricing of the commodities, a consumer's
budget restriction reveals the conceivable combinations of various goods she
can purchase. The relative cost of the commodities is equal to the slope of the
budget restriction.
The budgetary restriction is shifted outside with an increase in income.
The budgetary restriction is impacted by a change in the price of one of the
products.
A consumer’s indifference curves represent her preferences. An
indifference curve shows all the bundles that give the consumer a certain level
of happiness. The consumer prefers points on higher indifference curves to
points on lower ones.
The slope of an indifference curve at any point is the marginal rate of
substitution – the rate at which the consumer is willing to trade one good for
the other.
The consumer optimizes by choosing the point on her budget constraint
that lies on the highest indifference curve. At this point, the marginal rate of
substitution equals the relative price of the two goods.
When the price of a good falls, the impact on the consumer’s choices
can be broken down into two effects, an income effect, and a substitution
effect.
The income effect is the change in consumption that arises because a lower
price makes the consumer better off. It is represented by a movement from a
lower indifference curve to a higher one.
The substitution effect is the change that arises because a price change
encourages greater consumption of the good that has become relatively
cheaper. It is represented by a movement along an indifference curve.
The theory of consumer choice can be applied in many situations. It
can explain why demand curves can slope upward, why higher wages could
either increase or decrease labor supply and why higher interest rates could
increase or decrease saving.
References
1. Consumer Theory: Definition, Meaning, Objective, and Example
(investopedia.com)
2. Consumer Choices (tutorialspoint.com)