301lec4 - Lecture 4 Econ 301 Professor S Severinov Consumer...

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Lecture 4 Econ 301 Professor S. Severinov Consumer Behavior
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Consumer Choice Given preferences and budget constraints, how do consumers choose what to buy? They will choose a combination of goods that will maximize their utility, given the budget. The chosen optimal bundle is the most preferred among all bundles in the consumer’s budget set
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Consumer Choice Graphically, consider different indifference curves of a consumer choosing between clothing and food Consumer wants to choose highest utility within the budget. Remember that U 3 > U 2 > U 1
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Consumer Choice U 3 D U 2 C Food (units per week) 40 80 20 Clothing (units per week) 20 30 40 0 U 1 A B A, B, C on budget line D highest utility but not affordable C highest affordable utility Consumer chooses C
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Consumer Choice Consumer will choose highest indifference curve on budget line The optimal point, point C, is where the indifference curve is just tangent to the budget line Tangency means that the slope of the budget line equals the slope of the indifference curve at this point
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Consumer Choice Recall, the slope of an indifference curve is: C F MU MU MRS dF dC = = - C F P P Further, the slope of the budget line is equal to:
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