ch04 text - c04.qxd 10:58 AM Page 98 4 CHAPTER 4.1 4.2 4.3...

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According to the United States Bureau of Labor Statistics, in 2004 there were about 116 million households in the United States. The average household had before-tax annual income of about $54,400. Consumers in these households faced many decisions. How much should they spend out of their income, and how much should they save? On average, they spent about $43,400. They also had to decide how to divide their expenditures among various types of goods and services, including food, housing, clothing, transportation, health care, entertainment, and other items. Of course, the average values of statistics reported for all households mask the great variations in consumption patterns by age, location, income level, marital status, and family composition. Table 4.1 compares expenditure patterns for all households and for selected levels of income. How Much of What You Like Should You Buy? 4.1 THE BUDGET CONSTRAINT 4.2 OPTIMAL CHOICE 4.3 CONSUMER CHOICE WITH COMPOSITE GOODS 4.4 REVEALED PREFERENCE Appendix THE MATHEMATICS OF CONSUMER CHOICE APPLICATION 4.1 The Rising Price of Gasoline APPLICATION 4.2 Coupons versus Cash APPLICATION 4.3 Pricing a Calling Plan APPLICATION 4.4 To Lend or Not to Lend? APPLICATION 4.5 Flying Is Its Own Reward APPLICATION 4.6 Is Altruism Rational? 4 CONSUMER CHOICE CHAPTER c04.qxd 7/23/07 10:58 AM Page 98
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A casual examination of the table reveals some interesting patterns in consumption. Consumers with lower income tend to spend more than their current after-tax income, electing to borrow today and repay their loans in the future. For example, households with incomes in the $20,000– $30,000 range spend about $3,400 per year more than their after-tax income. By contrast, house- holds with incomes in excess of $70,000 save more than 30 percent their after-tax income. The table also indicates that consumers who attend college can expect to earn substantially higher incomes, a fact that influences the choice to attend college. Consumer decisions have a profound impact on the economy as a whole and on the fortunes of individual firms and institutions. For example, consumer expenditures on transportation affect the financial viability of the airline and automobile sectors of the economy, as well as the demand for related items such as fuel and insurance. The level of spending on health care will affect not only providers of health care services in the private sector, but also the need for public sector programs such as Medicare and Medicaid. This chapter develops the theory of consumer choice, explaining how consumers allocate their limited incomes among available goods and services. It begins where Chapter 3 left off. In that chapter, we developed the first building block in the study of consumer choice: consumer preferences. However, preferences alone do not explain why consumers make the choices they do. Consumer preferences tell us whether a consumer likes one particular basket of goods and services better than another, assuming that all baskets could be “purchased” at no cost. But it does
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ch04 text - c04.qxd 10:58 AM Page 98 4 CHAPTER 4.1 4.2 4.3...

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