Principles of Economics- Mankiw (5th) 457

Principles of Economics- Mankiw (5th) 457 - CHAPTER 21 THE...

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CHAPTER 21 THE THEORY OF CONSUMER CHOICE 471 typically, the indifference curves are bowed inward, but not so bowed as to be- come right angles. QUICK QUIZ: Draw some indifference curves for Pepsi and pizza. Explain the four properties of these indifference curves. OPTIMIZATION: WHAT THE CONSUMER CHOOSES The goal of this chapter is to understand how a consumer makes choices. We have the two pieces necessary for this analysis: the consumer’s budget constraint and the consumer’s preferences. Now we put these two pieces together and consider the consumer’s decision about what to buy. THE CONSUMER’S OPTIMAL CHOICES Consider once again our Pepsi and pizza example. The consumer would like to end up with the best possible combination of Pepsi and pizza—that is, the combi- nation on the highest possible indifference curve. But the consumer must also end up on or below his budget constraint, which measures the total resources available to him. Figure 21-6 shows the consumer’s budget constraint and three of his many in-
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