06-Consumer Choice

06-Consumer Choice - Consumer Behavior: Consumer Choice...

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Consumer Behavior: Consumer Choice Reading: Chapter 3 My problem lies in reconciling my gross habits with my net income. - Errol Flynn
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2 Consumer Choice Given preferences and budget constraints, how do consumers choose what to buy? Utility Maximization Subject to a Budget Constraint” or “Budget Line Meets Indifference Curves” Rational consumer approach: highest utility within her budget! Max F,C U(F,C) subject to: P F F + P C C = I
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3 Which bundle maximizes consumer’s utility? 1. It has to be on the budget line 2. It has to be on the highest possible IC Solution: Optimum bundle is where an indifference curve is tangent to the budget line Slope of the budget line equals the slope of the indifference curve at this point
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4 Consumer Choice U 3 D U 2 C Food  (units per week) 40 80 20 Clothing (units per  week) 20 30 40 0 U 1 A B A, B, C on budget line D highest utility but not  affordable C highest affordable  utility Consumer chooses C
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06-Consumer Choice - Consumer Behavior: Consumer Choice...

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