Ch4.pdf - Chapter 4 Consumer Choice 1 Learning Objectives...

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1 Chapter 4. Consumer Choice
2 Learning Objectives 4.1 Preferences. 4.2 Utility. 4.3 Budget Constraint. 4.4 Constrained Consumer Choice. 4.5 Behavioral Economics.
3 Premises of Consumer Behavior Individual tastes or preferences determine the amount of pleasure people derive from the goods and services they consume. Consumers face constraints or limits on their choices. Consumers maximize their well-being or pleasure from consumption, subject to the constraints they face.
4 Properties of Consumer Preferences (1 of 3) Completeness - when facing a choice between any two bundles of goods, a consumer can rank them so that one and only one of the following relationships is true: The consumer prefers the first bundle to the second, prefers the second to the first, or is indifferent between them. weakly prefer strictly prefer indifferent a b, b a, or both relationship hold, so that a b
5 Properties of Consumer Preferences (2 of 3) Transitivity - a consumer’s preferences over bundles is consistent in the sense that, if the consumer weakly prefers ( ) Bundle a to Bundle b (likes a at least as much as b ) and weakly prefers Bundle b to Bundle c , the consumer also weakly prefers Bundle a to Bundle c . a b and b c a c If completeness and transitivity hold, then the preference relation is said to be rational.
6 Properties of Consumer Preferences (3 of 3) More Is Better - all else being the same, more of a commodity is better than less of it. Good - a commodity for which more is preferred to less, at least at some levels of consumption. Bad - something for which less is preferred to more, such as pollution.
7 Preference Maps Indifference curve - the set of all bundles of goods that a consumer views as being equally desirable. Indifference map - a complete set of indifference curves that summarize a consumer’s tastes or preferences.
8 Figure 4.1 Bundles of Pizzas and Burritos Lisa Might Consume (1 of 2)
9 Figure 4.1 Bundles of Pizzas and Burritos Lisa Might Consume (2 of 2)
10 Properties of Indifference Map 1. Bundles on indifference curves farther from the origin are preferred to those on indifference curves closer to the origin. 2. An indifference curve goes through every possible bundle. 3. Indifference curves cannot cross. 4. Indifference curves slope downward.
11 Figure 4.2 Impossible Indifference Curves
12 Solved Problem 4.1 Can indifference curves be thick? Answer: Draw an indifference curve that is at least two bundles thick, and show that a preference property is violated.
13 Willingness to Substitute Between Goods Marginal rate of substitution (MRS) - the maximum amount of one good a consumer will sacrifice to obtain one more unit of another good.

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