Chapter 5

Chapter 5 - Chapter 5 Different Types of Tastes In Chapter 4 we demonstrated how tastes can be represented by maps of indifference curves and how 5

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Unformatted text preview: Chapter 5 Different Types of Tastes In Chapter 4 we demonstrated how tastes can be represented by maps of indifference curves and how 5 basic assumptions about tastes result in particular features of these indifference curves. 1 In addition, we illustrated how tastes can be more formally defined and how these can be mathemati- cally represented as utility functions. We now proceed to analyzing how maps of indifference curves can differ in important ways while still satisfying our 5 basic assumptions. This will tell us much about how different types of tastes can be modeled using our simple graphical framework as well as the more general mathematical framework that builds on our graphically derived intuitions. For instance, if two goods are close substitutes for one another, the indifference map that represents a consumer’s tastes for these goods will look very different from one representing tastes for goods that are close complements — even though both types of indifference maps will satisfy our 5 basic assumptions. Shapes of indifference curves then translate into specific types of functional forms of utility functions. One of the important insights that should emerge from this chapter is that our basic model of tastes is enormously general and allows us to consider all sorts of tastes that individuals might have. You may like apples more than oranges and I may like oranges more than apples; you may think peanut butter and jelly go together well while I think they can’t touch each other; you may see little difference between French wine and California wine while I may think one is barely drinkable. Often students that are introduced to indifference curves get the impression that they all look pretty much the same, but we will find here that their shapes and relationships to one another can vary greatly, and that this variation produces a welcome diversity of possible tastes that is necessary to analyze a world as diverse as ours. 5A Different Types of Indifference Maps Understanding how different tastes can be graphed will therefore be important for understanding how consumer behavior differs depending on what the consumer’s underlying tastes are. We will begin in Section 5A.1 by discussing the shape of individual indifference curves for different types of goods. This will give us a way of talking about the degree to which consumers feel that different goods are substitutable for one another and the degree to which goods have their own distinct 1 Chapter 4 is necessary as background reading for this chapter. 120 Chapter 5. Different Types of Tastes character. We then proceed in Section 5A.2 with a discussion of how indifference curves from an indifference map relate to one another depending on what kinds of goods we are modeling. This will tell us how a consumer’s perception of the value of one good relative to others changes as happiness – or what we will later call “real income” – increases. Finally, we conclude in Section 5A.3 by– or what we will later call “real income” – increases....
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This note was uploaded on 05/13/2010 for the course ECON 105D taught by Professor Cur during the Fall '09 term at Duke.

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Chapter 5 - Chapter 5 Different Types of Tastes In Chapter 4 we demonstrated how tastes can be represented by maps of indifference curves and how 5

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