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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 gel3d 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 givedo? 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 curte [32. 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 eelLe for one cart
For one can of eelre. 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 Ili 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'eindiffcienee 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
curtes. 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 dimmiiihFF 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 aleops 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 tradeoff 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 Huhdd 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 hIHS 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 Lshaoed. In this case the consumer warts
:ci ctnstune the junta grinds in a ﬁxed proportion. Stiff {JI'iE unit [if EDDIE] l for every l unit
of good 2. if she has intre 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
tooli 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 apEndﬁ 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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