six4 - Key issues Chapter 4 Consumer Choice 1. 2. 3. 4....

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1 Chapter 4 Consumer Choice Key issues 1. properties of preferences 2. utility 3. budget constraint 4. consumer's constrained choice Tastes • individual tastes (preferences) determine pleasure people derive from goods • economists usually • take tastes as given • do not judge taste Individual decision making • consumers face constraints on their choices • consumers maximize their pleasure from consumption subject to constraints • we want to predict behavior--not judge i Consumer’s problem • consumer allocates money over goods: buys a bundle or market basket of goods • 2 possible theories of consumer behavior • maximizing behavior • random behavior (next chapter) Assumptions about consumer preferences 1. completeness 2. transitivity 3. more is better
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2 Assumption 1: Completeness • consumer can rank any two bundles of goods • only one of following is true: consumer • prefers Bundle x to Bundle y • prefers Bundle y to Bundle x • is indifferent between them Assumption 2: Transitivity (rationality) • consumer's preference over bundles is consistent: • if consumer prefers • Bundle z to Bundle y and • Bundle y to Bundle x • then consumer prefers Bundle z to Bundle x Economist’s transitivity experiment • Weinstein (1968) • no subject knew the purpose of the experiment • each given choices between 10 goods of equal value, offered in all possible combinations of pairs • $3 in cash • 8-cup Wearever aluminum coffee percolator • free pass to next 4 Saturday matinees at subject's favorite motion picture theater Results • transitive responses • 93.5% adults ( 18 years old) • 79.2% children aged 9 to 12 • result may explain why political and economic restrictions are placed on youths Psychologists' transitivity experiment • Bradbury and Ross (1990) • share of people who made intransitive choice involving 3 colors: • nearly 50% of 4 or 5 year olds • 15% of 11-13 year olds • 5% for adults • novelty (a preference for a new color) is responsible for most of the intransitive responses • novelty effect is especially strong in children Assumption 3: More is better • more of a good is better than less of it • good: commodity for which more is preferred to less at least at some levels of consumption • bad: something for which less is preferred to more, such as pollution • consumers are not satiated
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3 Which assumptions are critical for our model? • completeness and transitivity assumptions are crucial • more-is-better assumption is included only to simplify the analysis Why do economists make the more-is-better assumption? • it appears to be true about most people • with free disposal, you can't be worse off with extra goods • consumers only buy goods where this condition is met (we'll show later) Preference maps • we summarize information about a Lisa’s preferences using a graph • we can rank some bundles using more-is- better assumption Figure 4.1a Bundles of Pizzas and Burritos Lisa Might Consume B , Burritos per semester
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This note was uploaded on 11/20/2010 for the course ECONOMICS 331 taught by Professor Mj during the Fall '10 term at University of Alberta.

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six4 - Key issues Chapter 4 Consumer Choice 1. 2. 3. 4....

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