ch04 - Chapter 4: Consumer Choice 1 Consumer Expenditures,...

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1 Chapter 4: Consumer Choice Chapter 4: Consumer Choice

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2 Consumer Expenditures, US, 2001   Yearly After Tax Income:   \$42,362  Yearly Total Expenditures: \$40,900           Allocation of Spending Food  \$5,904  Housing  \$12,248  Transportation  \$8,672  Health care  \$2,239  Entertainment  \$1,958
3 Price of x: P x  ;  Price of y: P y               Income:    I Total expenditure on basket (X,Y): P x X + P y Assume only two goods available: X and Y The Basket is Affordable if total expenditure does not exceed total Income: P X X + P Y Y ≤ I

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4 P x X + P y Y = I Y = I/P y  – (P x /P y )X The set of baskets that are affordable is the consumer’s The         defines the set of baskets that  the consumer may purchase given the income available.  The                      is the set of baskets that are just  affordable: budget constraint budget line budget set .
5 Two goods available: X and Y I = \$10 P x  = \$1 P y  = \$2 Budget line:     1X + 2Y = 10   …BL 1 Or…     Y = 5 – X/2

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6 I/P X = 10 Y X A C I/P Y = 5 Budget line = BL 1 -P Y = -1/2 If the price of X rises, the budget line gets  steeper and the horizontal intercept shifts in If the price of X falls, the budget line gets  flatter  and the horizontal intercept  shifts out
7 Y X 10 5 BL 1 6 12 BL 2 I = \$12 P X = \$1 P Y = \$2 Y = 6 - X/2 …. BL 2 If the price of X rises, the budget line gets  steeper and the horizontal intercept shifts in If the price of X falls, the budget line gets  flatter  and the horizontal intercept  shifts out Shift of a budget line

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8 Y X 5 6 I = \$10 P X = \$1 P Y = \$3 Y = 3.33 - X/3 …. BL 2 BL 1 BL 2 3.33 10 If the price of X rises, the budget line gets  steeper and the horizontal intercept shifts in If the price of X falls, the budget line gets  flatter  and the horizontal intercept  shifts out Rotation of a Budget Line
9 Assume:    Only non-negative quantities      "Rational” choice:  The consumer    chooses the basket that    maximizes his satisfaction given    the constraint that his budget    imposes. Consumer’s Problem:                 Max U(X,Y)                (X,Y)                 subject to: P x X + P y Y <  I

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10 10 A graphical interpretation first… Interior Optimum :  The optimal consumption  basket is at a point where the indifference curve is  just  tangent  to the budget line.
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This note was uploaded on 04/03/2008 for the course ECON 301 taught by Professor Hassan during the Spring '08 term at Rutgers.

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ch04 - Chapter 4: Consumer Choice 1 Consumer Expenditures,...

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