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PR%20chapter%203 - Chapter 3 Consumer Bflhflbmr up fewer...

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Unformatted text preview: Chapter 3: Consumer Bflhflbmr up fewer units or the good on the Vertical axis in exehenge for one more unit of the gel-3d on the horizontal axis. This assumption also means thst balanced t'nsrket baskets are preferred to easli'ets the: have s. lot of one good and vsr_v little of the other good. 2. Can a set of inflif’fer about the two give-do? A set if indifference eurves can he upward sloping if we violate assumption number three; more Is preferred to less. When a set of indifference eurves is upward sloping. It means one of tie grinds is s. “has!” in that the consumer prefers less of the good rather than more of the good. The positive slope means that. the ecneumer will accept Lttnre of the had good only if she also receives more of the other good in return. As we more. up along the. indifference curve the oonsumtt' has more of the good she lilies. and also more of the good she does not like. once eurves he upward sloping? If so, what would this tell you 3. Explain why two indifference curves eennot intersect. The explanation is most easily;- nehieve'l with the aid of a graph sueh as. Figure 5.3, whirh shows two indifFerenee eurv es intersecting at point :1. We know frem the rlniiniticn of an indiFfortnce curve that s oonsurner has the same level of utility along art;-r given curve. In the ease. the :onsulner is indifferent between bundles A and H heeeuse the}r hoth lie or. indifferenee nurse [.5]. Similarly. the consumer is indifferent ._; lurttseen bundles A eirl' on mdifierence curt-e [3-2. H}; the 'L t (3' because the},r bfilJ'l lie. . should also he indifferent between C and 5'. '. transitivitjr of preferences this mneumo.‘ However, we see from the graph that L‘ lies shove B. so C must he preferred m it. Thus. es tanner 1n toreeet Ls proves. the feet that ind iFForeuuo our": Good 1’ EL LI 2 EL L'rl ———————————_— .I. Good It Figure 3.3 4!. Jon is nlways willin g to trade one can of eel-Le for one cart For one can of eel-re. of Sprite, or one can of snrite a. 1illi’ltat ean you say aliniit Jan’s marginal rate of substitution? Jon’s margins] rate of substitution can In defined! as the number of mm at role: he would be willing to give up in exchange for a sun of sprite. Since he. is nl'llr'fll‘v'sii-‘iliing to trade one for one: his l'i-‘lltti Il-i equal [ti 1. 24 Cfiopier 3; Consumer Behavior _—I-'_'—_—_q——I—_I— b. Draw a set of indifference curves for Jon. Since Jon is always willing to trade one can of coke for one can of sprite, his indifference curves an: linear with a. slope of—l. e. Draw two budget lines with different slopes and illustrate the satisfaction— inaxirniring choice. 1flifloint conclusion can you draw? Jon'eindiffci-enee curves are linear with a slope of—l .lon’s htidget line. 15: also linear. and will have a slope that reflects the ratio of the two prices. if Jon's budget L'ne is steeper than his indifference curves then he Will choose to consume only the good on the cortical nitis. 1f Jens burlgst line is flatter than his indifference curves then he will choose to consumer :inlg.r the good on the horizontal axis. Jon will always choose a corner solution. unless his budget line has the same slope as his indifference curt-es. In this ease antr combination of Eprite and Coke that uses up his entire income with maximize hzs satisfaction. 5. What happens to the marginal rate of substitution as you more along a convex indifference curve? A linear indifference curve? The MRS measures how much of a good you are willing to give up in exchange for one more unit. of the. other Euud: keeping utility constant. The MR9- dimmii-ih-FF- fill-“mg fl conceit indifference cone in the: as you move down along the indifference curve. you are willing to give up less and less of the one good in exchange for the other. The MRS is also the HkaE of the indifference curve. which increases {becomes less negative] as you more down along the indifference curve. The MRS is constant along a linear inditi'ei'encc curve. since in this case the slope does r.ot change. The ions-.uner is ale-ops willing to trade the same number of units of one good Ln exchange for the other. H. Explain who no MRS between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction. The lull'tfi describes the rate at which the consumer is willing to trade one good for another to maintain the same lech of satisfaction. The ratio of prices describes the trade-off that the market is 1willing to make between :he same two goods. The tangencj.i of the indifference curve with the hL'dge'. line represents the point at which the trade- of'fs are equal and monomer satisfaction is luav'lm'i'fllfl If the MRS between two Huh-dd is not equal to the ratio of prices, then the consumer could trade one good for another at market prices to obtain tugher levels of satisfaction For example. if the slope of the budget has [the ratio of the prices} is —r] then the consumer can trade 4 pints of good 2 for one unit of good 1. if the MRS at the current bundle is —G. then the answer is walling to trade El units of good 2 for one unit of good 1. Since the two slopee are not equal the consumer is not maximizing her satisfactionT The consumer is willing to trade 6 but only has to trade 4, so she should roalte the trade. This trading continues until the hlghest iexcl of satisfaction is achieved. the trades are made, the h-IHS will charge and become equal to :hc price ratio. 'l'. Describe the indifference curves associated with two goods that are perfect substitutes. What if the}.r are perfect complements? Two goods are perfect subattutes if the It'll-{cl ofone for another is a constant number. {irivzn the MRS w. a constant number. the slope of the. indifference curves will be constant, and the indifference curves are therefore linear. If two goods are perfect complements, the indifference curves are L-shaoed. In this case the consumer warts :ci ct-nstune the junta grinds in a fixed proportion. Stiff {JI'iE unit [if EDDIE] l for every l unit of good 2. if she has int-re of one good but not more of the other then she does not get s or extra satisfaction. Cftflflfcr 3: Consumer Eehnofor ——-——-—-—_._._.____________ 6. Suppose that Jones and Smith have Earth flnni entertainment budget in the form of hockey games or rock concerts. They both like hnolrey guinea and rock concerts and will choose to consume positive quantities of both goods. However. they difi'er substantially in their preferences for these two forms of entertainment. Jones prefers hockey games to rock concerts, while Smith prefers rock concerts to hockey games. ded to allocate snooo per year to an a. Draw a sat ofind Given they each like both goods and the}r will each choose quantities :if both goods, we can assume their ind convex shape. However since Jones has an overall prefersnci- for hockey and Smith has an overall preference for rock concerts. their two sets of indifference curves will have different slopes. Suppose that we place rock concerts on the vertical aria and hockey games on the horizontal axis, Jones will have a larger MRS than Smith. Jones is willing to give up more rock concerts in exchange. for e hockey game since he prefers hockey games. The indifference curves for Jones will he steeper. ifferenoe curves for Jones and a second set for Smith. to consume positive iffcrence curves have the normal b. Using the concept of marginal rate of sub stitution. explain why the two sets of curves are different from each other. At my combinazion of Jockey games and rock concerts. Jones is willingIr to give up more tool-i concerts for an additional hickev genie. whereas, Finitl: is wflling to give up fewer rock concerts for an additional hockey game. Since the 1"; IRS is a measure of how many of me good [rock concerts} so ll'lISll‘lr'JJ usl is willing to give up for or: additional unit of the other gmd {hockey games}, then the MR5, and hence the slope of the indifference curves. wdi he dzfl'erent for the two lndit'Ldunls. 7. The price of DVDs {1}} is 32D and the price of CDs to spend on the two goods. Quppoec that he has all." addition there are 3 more DVDs and 5 more CDs lC} ls Ell]. Philip has a budget of $11“) early bought one DVD and one CD. In that he would really like to hey. a. Given the above prices and ineorne1 the horizontal axis. Hie budget line is 11.1) +— fiff = i, or 2013+: oc=1oo If he apEn-dfi his entire income on DVD‘s he could afford to buy 5. If he spends his entire income on CD’s hc coo‘rl effort] to bug.r 1t]. draw his budget line on a graph with one on b. Considering what he has already purchased. and what he still wants to purchase. identify the three different bundles of L'le and DVDs that he could choose. Assume that he cannot purchase fractional units for this part ofthe question. {liven he has already purchased one of each. for a total of $3CI. he has Mt: left, Since he wants 3 more U‘v’D'e he can buy these for $130 and spend his remaining .‘lilfl on 1 CD. This is the first bundle below. He ootdd also choose to buy only 2 DVDs for $40 and spend the remaining $30 on 3 CD’s. He can choose the following bundles: Purchased Quantities Total Quantities h C D Q s 1 s e s s s 4 1 5 at 2 r- l” En- ...
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