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You buy your music online and play it on an iPod. And as the prices of a music download and an iPod have tum- bled, the volume of downloads and sales of iPods have skyrock- eted. But a similar change hasn’t occurred in the way we buy and read books. Sure, electronic textbooks—e-books—are widely available, and their prices have fallen. At the same time, the prices of old-tech, printed paper books have risen. Yet most students continue to buy printed textbooks. Why, when e-books are cheaper than printed books, have e-books not caught on and replaced printed books in the same way that the new music technologies have replaced physical discs? Dramatic changes have occurred in the way we spend our time. The average workweek has fallen steadily from 70 hours a week in the nineteenth century to 35 hours a week today. While the average workweek is now much shorter than it once was, far more people now have jobs. Why has the average workweek declined? In this chapter, we’re going to study a model of choice that predicts the effects of changes in prices and incomes on what people buy and the effects of changes in wage rates on how people allocate their time between leisure and work. At the end of the chapter, in Reading Between the Lines , we use the model to explain why e-books are having a hard time replacing printed books. Possibilities, Preferences, and Choices 8 169 Describe a household’s budget line and show how it changes when prices or income change Use indifference curves to map preferences and explain the principle of diminishing marginal rate of substitution Predict the effects of changes in prices and income on consumption choices Predict the effects of changes in wage rates on work- leisure choices After studying this chapter, you will be able to:
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Consumption Possibilities Consumption choices are limited by income and by prices. A household has a given amount of income to spend and cannot influence the prices of the goods and services it buys. A household’s budget line describes the limits to its consumption choices. Let’s look at Lisa’s budget line. * Lisa has an income of $40 a month to spend. She buys two goods: movies and soda. The price of a movie is $6, and the price of soda is $4 a case. Figure 8.1 shows alternative combinations of movies and soda that Lisa can afford. In row A , she sees no movies and buys 10 cases of soda. In row F , she sees 5 movies and buys no soda. Both of these combinations of movies and soda exhaust the $40 available. Check that the combination of movies and soda in each of the other rows also exhausts Lisa’s $40 of income. The numbers in the table and the points A through F in the graph describe Lisa’s consumption possibilities. Divisible and Indivisible Goods Some goods— called divisible goods—can be bought in any quan- tity desired. Examples are gasoline and electricity.
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