06A Appendix

Consumer Behavior

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
 The Budget Line: What is Attainable

• Combinations of two products a

consumer can purchase with their
money income
• Slope is the ratio of the price of B to
the price of A
• Location varies with income changes
• Location varies with price of products

LO6 6App-
 The Budget Line

12
Units of A Units of B Total Income = $12
(Price = (Price = $1) Expenditur 10 PA = $1.50
$1.50) e

Quantity of A
8 0 $12 8 (Unattainable)
6 3 12 6
4 6 12 Income = $12
4
2 9 12 PB = $1
2 (Attainable)
0 12 12
0
2 4 6 8 10 12
Quantity of
B

LO6 6App-
Indifference Curves: What is Preferred

• Combinations of two products that

yield the same amount of total utility
• The consumer is indifferent as to
which combination to purchase
• Characteristics
• Downsloping
• Convex to the origin
• Reflects the MRS

LO6 6App-
 Indifference Curves

12 j
10

Quantity of A
8
k
j 12 2 6
l
k 6 4 4 m

l 4 6 2 I

m 3 8 0
2 4 6 8 10 12
Quantity of
B

LO6 6App-
 The Indifference Map

• Series of indifference curves where

each curve reflects different amounts
of utility
• Each successive curve outward
reflects a higher level of utility

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 The Indifference Map

12

10

8
Quantity of A

2 I4
I3
I2
0 I1
2 4 6 8 10 12
Quantity of B

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 Equilibrium at Tangency

• The consumer’s equilibrium position

• Indifference curve is tangent to the
budget line
• Utility is maximized
• MRS equals the ratio of the price of
B to the price of A

LO6 6App-
 Equilibrium at Tangency

12

10
PB
MRS =
PA
8
Quantity of A

Preferred –
6 W but requires
more
4 X income
I4
2 I3
I2
I1
0
2 4 6 8 10 12
Quantity of B

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 Derivation of the Demand Curve
12

10

Quantity of A
8

6
X
4

2
I3
I2
0
2 4 6 81 12
Quantity of B0
Price of B

$1.5
0
1.0
0
.
50 DB
2 4 6 8 10 12
Quantity of B

LO6 6App-