SGABCh5 - C H A P T E R 5 Different Types of Tastes While...

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Unformatted text preview: C H A P T E R 5 Different Types of Tastes While Chapter 4 introduced us to a general way of thinking about tastes, Chapter 5 gets much more specific and introduces particular dimensions along which we might differentiate between tastes. In particular, we differentiate tastes based on 1. The curvature of individual indifference curves — or how quickly the MRS changes along an indifference curve ; 2. The relationships between indifference curves — or how the MRS changes across indifference curves within an indifference map ; and 3. Whether or not indifference curves cross horizontal or vertical axes or whether they converge to the axes . The first of these in turn determines the degree to which consumers are will- ing to substitute between goods (and will lead to what we call the "substitution effect" in Chapter 7) while the second of these determines how consumer behavior responds to changes in income (and will lead to what we call the "income effect" in Chapter 7). Finally, the third category of taste differences becomes important in Chapter 6 where we will see how corner versus interior optimal solutions for a consumer emerge. Chapter Highlights The main points of the chapter are: 1. The degree of substitutability or, in part B language, the elasticity of sub- stitution for a consumer at a particular consumption bundle arises from the curvature of the indifference curve at that bundle. There may be no sub- stitutability (as in perfect complements) or perfect substitutability (perfect substitutes) or an infinite number of cases in between these extremes. Different Types of Tastes 60 2. Quasilinearity and Homotheticity of tastes represent special cases that de- scribe how indifference curves from the same map relate to one another. These properties have no direct relationship to the concept of substitutabil- ity. Tastes are quasilinear in a good x if the MRS only depends on the level of x consumption (and not the level of other goods’ consumption. Tastes are homothetic when the MRS depends only on the relative levels of the goods in a bundle. 3. Sometimes it is reasonable to assume that indifference curves only converge to the axes without ever crossing them; other times we assume that they cross the axes. When an indifference curve crosses an axis, it means that we can gain utility beyond what we have by not consuming even if we consume none of one of the goods. When indifference curves only converge to the axes, then some consumption of all goods is necessary in order for a consumer to experience utility above what she would experience by not consuming at all. 4. If you are reading part B of the chapter, you should begin to understand the family of constant elasticity of substitution utility functions — with perfect complements, perfect substitutes and Cobb-Douglas tastes as special cases....
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This note was uploaded on 11/17/2010 for the course ECON 100A taught by Professor Woroch during the Fall '08 term at Berkeley.

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SGABCh5 - C H A P T E R 5 Different Types of Tastes While...

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