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Macroeconomics 1CE
Karlan/Morduch/Alam/Wong
Instructor’s Manual
CHAPTER 7
CONSUMER BEHAVIOR
Chapter Overview
The ideas in this chapter are at the very heart of economic analysis. Everything in the following
chapters (and for that matter, the preceding chapters) is in some way based on the assumption
that people attempt to maximize their utility within the limitations of the resources available to
them. We’ll enrich this picture in the coming chapters, seeing that individuals have to answer a
lot of tough questions when making even commonplace decisions. When will the costs arrive
relative to the benefits? What are the risks? Am I fully informed about the situation? Are others
competing with me for the same goal?
The idea of utility maximization is remarkably flexible. We’ll see that people often have
preferences that extend far beyond a narrow definition of their own benefit. Sometimes they
pursue their goals in unexpected or not entirely rational ways. Nonetheless, the essential idea
of individuals pursuing the things they want in the face of scarcity drives economic analysis
from A to Z.
Learning Objectives
LO 7.1: Explain how revealed preferences indicate which goods or activities give a person the
most utility.
LO 7.2: Show how the budget constraint affects utility maximization.
LO 7.3: Show how a change in income affects consumption choices.
LO 7.4: Show how a change in price affects consumption choices, and distinguish between the
income and substitution effects.
LO 7.5: Outline the ways in which utility is influenced by outside perceptions, and describe how
people get utility from altruism and reciprocity.
Chapter Outline
Class Discussion: Revealed Preference, Maximizing Utility within Constraints, and Changes in
Income (LO 7.1, LO 7.2, LO 7.3)
Consider showing two brief scenes from the movie Dumb and Dumber. In the movie, Harry and
Lloyd discover that they have a suitcase full of money in their possession. They had been barely
scraping by throughout the movie, but by the end of the movie they have so much money that
they use it to blow their nose. Show 1:10:10 to 102:00:00 and 1:25:15 to 102:00:00.
Review Questions
1. Which of the following activities give you positive utility? [LO 7.1]
a. Playing sports
b. Receiving a prestigious scholarship
c. Buying a new TV
d. Eating Brussels sprouts
e. All of the above
Answer: For me, the answer is e, all of the above. Playing sports, receiving a scholarship,
and buying a TV would all give me utility—and Brussels sprouts are my favorite vegetable.
Of course, the answer will differ for each individual. Other people may find that any amount
of Brussels sprouts makes them very unhappy.
2. Your gym offers two classes at the same time: weightlifting and yoga. Both classes are
included in your membership and have space available. Your friend tells you he wants to
work on his strength and take the weightlifting class, but you always see him in yoga class.
Which class gives him more utility? How do you know this? [LO 7.1]
Answer: Yoga class gives your friend the most utility. You know this because your friend
reveals his preference by his actions. The fact that your friend chose to go to yoga class
“reveals” that he prefers it to weightlifting class. He may say that he wants to increase his
strength by weightlifting, but his choice to go to yoga indicates that he is happier going to
this class.
3. Evie has a gift pass for unlimited rollercoaster rides on her birthday. Given the information
about Evie’s utility in Table 7P-1, explain why she chooses to ride only three times. [LO
7.1]
Answer: Evie’s marginal utility is positive for the first three rides. It makes sense for Evie to
take these rides. However, Evie’s marginal utility is negative after the third ride (perhaps she
starts to feel sick), and a fourth ride will decrease her happiness.
4. Dan likes to spend his allowance on two things: candy and toys. What are the three
constraints that determine the possible consumption bundles of toys and candy available to
Dan? [LO 7.2]
Answer: Dan’s budget constraint is determined by the amount of his allowance, (whatever
bundle of toys and candy Dan chooses, it cannot cost more than the money he has to spend),
the price of toys, and the price of candy. Together, these three constraints determine the
possible consumption bundles available to Dan.
5. Evan has $40 to spend at an amusement park. The roller coaster costs $10 per ride. Given the
information about Evan’s utility in Table 7P-2, explain why he chooses to ride only three
times. [LO 7.2]
Answer: Evan can afford four roller coaster rides, and his marginal utility from the fourth
ride is still positive. The fact that Dan does not choose to ride the roller coaster a fourth time
must mean that the marginal utility he gets from the fourth ride is less than the utility he
would get from spending that $10 on something else.
6. Suppose a wedge of cheese is $10, and a loaf of bread is $5. What is the opportunity cost of
purchasing a wedge of cheese (in terms of bread)? Explain what happens to the opportunity
cost of purchasing a wedge of cheese (in terms of bread) if your income decreases by 20
percent. [LO 7.3]
Answer: The opportunity cost of purchasing a wedge of cheese is two loaves of bread
because the $10 you spend on a wedge of cheese could have purchased two loaves of bread.
If your income decreases by 20 percent, your budget constraint shifts in. You are now able to
buy less bread and cheese. However, the opportunity cost of purchasing a wedge of cheese
has not changed. As long as the price of cheese is still $10 and bread is still $5, the
opportunity cost of purchasing a wedge of cheese is still two loaves of bread. A change in
your income does not change the relative tradeoff between the goods you consume. This
trade-off is determined by the prices of the goods.
7. Simone spends $200 a month on voice lessons and dance lessons. She just learned that
starting next month her favorite dance instructor is moving out of town and the monthly rent
for her apartment is increasing. How will each of these events affect Simone’s budget
constraint for voice and dance lessons? [LO 7.3]
Answer: The fact that Simone’s favorite instructor is moving may reduce her consumption
of dance lessons, but it will not affect her budget constraint. Simone’s increase in rent,
however, will probably reduce the amount of money she has available for lessons. If so,
Simone’s budget constraint will shift in. She will need to reduce the number of voice or
dance lessons (or both) she takes.
8. Julian buys plants and flowers every month. Both are normal goods. When the price of
flowers fell, Julian purchased fewer plants. Which effect was stronger for Julian, the income
effect or the substitution effect? [LO 7.4]
Answer: The substitution effect was stronger. When the price of flowers falls, the income
effect predicts that Julian will buy more flowers and more plants because both are normal
goods. However, the income effect predicts that Julian will substitute toward flowers and
away from plants because plants have become more expensive relative to flowers. We don’t
know which effect will prevail until we observe Julian’s behavior. Since he purchased fewer
plants, the substitution effect was stronger for Julian.
9. Sarah spends her monthly entertainment budget on books and movies. Sarah’s initial utility-
maximizing combination of books and movies is five movies and two books a month.
Assume the price of books falls. Sarah’s new utility-maximizing combination of books and
movies is five movies and four books. Given this information, can we say whether movies
are a normal good? [LO 7.4]
Answer: Yes. We know that the substitution effect will lead Sarah to substitute away from
movies and toward books, since books are now cheaper relative to movies. The substitution
effect is negative for movies. Since consumption of movies remains constant, this means that
the income effect must be positive and lead Sarah to consume more books, offsetting the
negative substitution effect. If the income effect is positive when purchasing power increases,
the good is normal.
10. An organization that raises money to provide meals for seniors gives tote bags to its donors.
Sami thinks it is wasteful to spend donated money on tote bags for donors because the money
could be used to provide more meals. Explain to Sami why giving tote bags could make
financial sense for the organization. [LO 7.5]
Answer: The benefit of giving the bags outweighs the cost of the bags. It is a worthwhile
incentive.
11. Your friend says, “I’d rather be a big fish in a small pond than a small fish in a big pond.”
What concept does this comment illustrate? [LO 7.5]
Answer: Your friend has illustrated the concept of frames of reference. Your friend is saying
that she would rather be an in a smaller setting if she can be an important player than be in a
larger setting if her role is diminished. This is similar to an actor saying she would rather play
the lead in her community theater than play a bit part on a Broadway stage.
1. Total utility is maximized when marginal utility becomes (positive, zero, negative). [LO 7.1]
Answer: Zero. If marginal utility is positive, total utility will increase if you consume the
next unit. If marginal utility is negative, total utility will decrease if you consume the next
unit. If marginal utility is zero, total utility is maximized, and the next unit will neither
increase nor decrease total utility.
2. Table 7P-3 shows the total utility that John gets from ice cream, for each quantity he
consumes. Fill in the third column showing the marginal utility he gets from each additional
scoop. [LO 7.1]
Answer:
Quantity of ice Marginal utility of the last
Total utility
cream (scoops) scoop eaten
1 10 10
2 17 7
3 21 4
4 23 2
5 23 0
3. You love going to the movies. For your birthday, your friend offers to take you to a triple
feature without popcorn or a double feature with two bags of popcorn. Table 7P-4 shows
your utility for movies and popcorn. Which option should you choose? [LO 7.1]
Answer: You will be happiest choosing the double feature with popcorn. Even though you
get no additional utility from the second bag of popcorn, the first bag of popcorn gives you 5
units of utility, which is more than the marginal utility of the third movie (three units). A
double feature with popcorn gives you 20 units of utility, whereas a triple feature gives you
18 units of utility.
4. Refer to the budget constraint for jeans and T-shirts in Figure 7P-1. Which of the following
consumption bundles is attainable? [LO 7.2]
a. 3 pairs of jeans, 1 T-shirt.
b. 2 pairs of jeans, 4 T-shirts.
c. 2 pairs of jeans, 3 T-shirts.
d. 1 pair of jeans, 4 T-shirts.
Answer: d: 1 pair of jeans, 4 T-shirts. This is the only consumption bundle that falls on the
budget constraint. All other bundles are unattainable, given current resources.
5. Petra has $480 to spend on DVDs and books. A book costs $24 and a DVD costs $15. [LO
7.2]
a. Write an equation for the budget constraint. Let x = 5 books. Let y = 5 DVDs.
b. Use your equation to determine how many books Petra can buy if she buys 8 DVDs.
Answer:
a. 480 = 24x + 15y
b. 480 = 24x + 15(8)
480 = 24x + 120
360 = 24x
15 = x
Petra can buy 15 books if she buys 8 DVDs.
6. Jordan visits her sister several times a year. Jordan’s travel budget is $600, which she uses to
buy bus tickets and train tickets. The train costs $120 per trip, and the bus costs $40. [LO
7.2, 7.3]
a. Graph Jordan’s budget constraint.
b. How many total trips can Jordan take if she takes the train three times?
c. Suppose Jordan’s travel budget is cut to $360. Draw her new budget constraint.
d. How many train trips can she take if she doesn’t want to reduce the total number of trips
she takes each year?
Answer:
a, c. See BCa and BCc in the graph below.
b. Taking the train 3 times costs Jordan $360. This leaves her with $240 for bus rides. Since
each bus ride costs $40, Jordan can take 6 bus rides. Jordan takes a total of 9 trips each year
to see her sister.
d. If Jordan wants to continue to take 9 trips a year, she will need to take the bus for all 9
trips. Jordan will take zero train trips each year.
7. Maria has a $300 gift certificate at a spa that she can use on massages or manicures. A
massage costs $100, and a manicure costs $30. [LO 7.3, 7.4]
a. Write the equation for Maria’s budget constraint. Let x = 5 massages. Let y = 5
manicures.
b. Suppose Maria decides to split her gift certificate with a friend and transfers half of the
value of her gift certificate to her friend. Write the equation for her new budget
constraint.
c. After giving away half of her gift certificate, suppose the price of a massage increases by
50 percent before Maria can use her gift certificate. Write the equation for her new
budget constraint.
Answer:
a. 300 = 100x + 30y
b. 150 = 100x + 30y
c. 150 = 150x + 30y
8. Every year, Heather hosts a holiday party for her friends. Her party budget is $200. Heather
spends her budget on food platters that cost $25 each and on entertainment, which costs $50
per hour. [LO 7.4]
a. Graph Heather’s budget constraint for food and entertainment.
b. To reward her loyal business, the entertainment company Heather hires has offered her a
50 percent discount on entertainment purchases for this year’s party. On your graph,
illustrate Heather’s new budget constraint for food and entertainment.
c. Assuming that food platters and entertainment are normal goods, what can you say about
the quantity of each good that Heather will purchase after the discount? Will the quantity
of entertainment increase or decrease, or is the change uncertain? Will the quantity of
food increase or decrease, or is the change uncertain?
Answer:
a, b. See BCa and BCb in the graph below.
Heather can purchase up to 8 hours of entertainment, and it will really cost her only $200
after the 50 percent discount.
c. The discount for entertainment purchases affects Heather’s spending in two ways. The
income effect results because the discount effectively increases Heather’s “purchasing
power” for party spending. The income effect of the discount will induce Heather to
increase spending on both food and entertainment. The substitution effect arises because
the discount makes entertainment cheaper relative to food. The substitution effect
predicts that Heather will substitute spending toward entertainment and away from food.
Thus, we know that the quantity of entertainment will increase. For the quantity of
food, however the change is uncertain. We cannot be sure if Heather will increase or
decrease her food spending as a result of the discount on entertainment. It depends
whether, for Heather, the income effect or the substitution effect is stronger.
9. Hideki attends baseball games and goes to movie theaters. Baseball tickets cost $15, and
movie tickets cost $10. His entertainment budget is $180. [LO 7.4]
a. Graph Hideki’s budget constraint for baseball and movie tickets.
b. Suppose the home team is having a good season, and the price of baseball tickets goes up
to $20 per game. Graph the new budget constraint.
c. Assuming that baseball and movie tickets are normal goods, what can you say about the
quantity of each good that Hideki will consume after the price of baseball tickets goes
up? Will the quantity of baseball games he attends increase or decrease, or is the change
uncertain? Will the quantity of movies he watches increase or decrease, or is the change
uncertain?
Answer:
a, b. See BCa and BCb in the graph below.
c. The increase in the price of baseball tickets affects Hideki’s spending in two ways. The
income effect results because increase in price decreases Hideki’s “purchasing power”
for spending on all tickets. The income effect will induce Hideki to decrease spending on
both movie and baseball tickets. The substitution effect arises because movie tickets are
cheaper relative to baseball tickets than they were before. The substitution effect predicts
that Hideki will substitute spending toward movies and away from baseball. Thus, we
know that the quantity of baseball tickets will decrease. For the quantity of movie
Karlan 1CE Instructor’s Manual: Chapter 7
Copyright © 2017 McGraw-Hill Education. All rights reserved.
7-10
Macroeconomics 1CE
Karlan/Morduch/Alam/Wong
Instructor’s Manual
tickets, however the change is uncertain. We cannot be sure if Hideki will increase or
decrease his movie spending as a result of the price increase for baseball. It depends
whether, for Hideki, the income effect or the substitution effect is stronger.
10. For which of the following goods is the utility you get from consuming them likely to be
affected by the opinions of others? [LO 7.5]
a. MP3s.
b. A new car.
c. Running shoes.
d. A new laptop for class.
Answer: All of the above (a−d). The utility we get from consuming most goods is affected
by the opinions and perceptions of others. We tend to get more enjoyment from the goods we
consume if the people around us admire or at least approve of our choices.
11. Say whether each of the following situations is an example of altruism or reciprocity. [LO
7.5]
a. Giving a few canned goods to the local food bank for its annual food drive.
b. Helping someone move her couch after she helped you study for an upcoming exam.
c. The biological relationship between cleaner fish and large predators in the ocean, in
which cleaner fish keep the predator free from parasites and the predator keeps the
cleaner fish safe.
Answer: Reciprocity involves doing good things for people who did good things for us.
Altruism involves simply wanting others to be better off.
a. Altruism.
b. Reciprocity.
c. Reciprocity.
TALÁLKOZÁS.
1.
Egy idő óta Kant hazudik. Sajátságos egyáltalán nem beszél már
a tiszta ész kritikájáról és éppenséggel nem érthetetlen. A sorok
ugyanazok, a betűk nemkülönben. Az első három sor mindig mintha
megóvná méltóságát, de az után a betűk táncolni kezdenek. Nedves
égető fekete szemek villognak ki belőlük és egy hófehér, domború
sáv egy női mellkasból. Ah! A nyurga fiú megborzong és lopva néz
körül a szobában: nem látják mások is?
Tizenhét éves, csüggedt, tehetetlen álomvilágban kódorgó,
nyomorvilágában robotoló szegény fiú. Tegnap még az volt az
ideálja, hogy még egy leckét kapjon és aztán még egyet és akkor azt
mondhassa édesanyjának: édesanyám, ne dolgozzék többé a
boltba. És ha úgy beteljesednék minden, amint kívánná, azt
mondaná Évának is: ne búsulj, öcséd vagyok és apád leszek. Mire
pedig végére ér Kantnak, addig férfi is lesz belőle és örökre elkergeti
családja feje felől a gondokat.
De néhány napja csak – ugyan mi is lelte? Bellágéknál történt. A
szép, tudni vágyó, szánalomra és tiszteletreméltó Bellágnét tanította
úgy, mint máskor írásra, olvasásra. Mutogatta neki a betűket, az
meg utána mázolta. Nem valami könnyen tanul, de okos, ó, sok
természetes esze van. És olyan jó hozzá. Kikérdezi magánviszonyai
felől és megkínálja uzsonnával. Egy idő óta minden lecke után
uzsonnát is kap: kávét és kuglófot. Bellágné szörnyen szereti a kávét
és a kuglófot és minden délután háromszor is uzsonnázik. Hát igaz,
most teheti, azelőtt nem tehette, bizonyosan azért is teszi. Nagy sor
az a hirtelen gazdagságba csöppenés, az ember egyhamar nem
találja helyét és azt élvezi, amit eddig nélkülözött. A szobaleányból
lett gyárosné a kávét, meg a kuglófot.
A tanulás buzgóságában Bellágné egészen szorosan melléje
tologatta székét, az is megesett sokszor, hogy a kezét megfogta, úgy
segített neki a betűket kikanyarítani. A Jani fiú inkább félő tiszteletet
érzett ilyenkor, hogy a háziasszony kezét érinti, semmi mást. Utóbb
azonban különös elfogultság vett rajta erőt. Bellágné most már a
maga dolgairól kezdett beszélni. Panaszkodott. Hogy mennyit kell
szenvednie a kisasszonyoktól, akik, amennyire csak tehetik,
bosszantják. Az urát is csak este látja, soha nem viszi sehova,
mintha szégyelné. Ellenben a leányok sokszor lefogják maguknak és
viszik magukkal sétálni, meg színházba is. Ő még nem volt az urával
sehol. Hát élet ez? Azért, mert szegény volt? Bellág maga is
közönséges rongyos munkásember volt fiatal korában s bizony a
műveltsége sem sokkal különb az övénél. Nincs senkije, semmije,
úgy-e, ez szomorú állapot?
E panaszolkodás közben a boldogtalan menyecske tetemes
mennyiségű kuglófot fogyasztott, de Jani sajnálta és néma részvéttel
hallgatta. S mikor egészen fekete lett benne a szomorúság, a bús
asszony egyszerre csak mosolyogva, pajkosan teszi kezét a vállára
és vidáman mondja:
– No de azért ne haragudjunk, a jó Isten minden baj számára
teremtett orvosságot.
Valami különös beszédje volt az asszony szemének, amit Jani
nem értett meg, de magában megreszketett tőle. Egyszer a térde
véletlenül odaért a Bellágné térdéhez, nyomban visszahúzta, de az
asszony közelebb húzódott hozzá és szorosan hozzátapasztotta
térdét Janiéhoz. Forró pirosság öntötte el a fiú arcát, az asszony
meg tágranyílt, erős szemmel nézte.