Chap004 - Chapter 04 - Principles and Preferences Part II:...

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Chapter 04 - Principles and Preferences Part II: Consumption Decisions Chapter 4: Principles and Preferences Main Concepts and Learning Objectives This chapter focuses on four fundamental consumer demand concepts: Decision-making, Consumer preferences, Substitution between goods, and Utility. These concepts will be used in Chapter 5 to analyze consumer decisions. Skills needed for this chapter Students will be asked to use Excel to plot points for an equation, with two variables and several different parameter values. This requires setting up a spreadsheet in which the student enters a set of arbitrary values for the first variable, and then enters an equation into a new column to compute the implied values of the second variable. Students are also asked to plot points on graph paper. Students who master the material presented in this chapter will be able to: Use indifference curve graphs to analyze consumer decision-making Compute MRS Use indifference curve graphs to understand the relationship between two goods (substitute, perfect substitute, perfect complement, etc) 4-1
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Chapter 04 - Principles and Preferences Multiple Choice Quiz (10 questions) covering main points: 1. Application 4.1 describes the Netflix business strategy of analyzing customer preferences and then recommending movies that customers may enjoy. Check out the Netflix website. Netflix uses two strategies to understand the preferences of individual customers: a. Ask customers to rate movie categories (such as comedy, drama, etc) b. Ask customers to rate specific movies and then deduce customer preferences from those ratings. This requires sophisticated statistical analysis to identify (i) the common characteristics shared by movies the customer enjoyed, (ii) the characteristics shared by movies the customer did not enjoy, (iii) the characteristics of movies the customer chose to watch in the past, (iv) characteristics of new movies that match the customer’s apparent preferences, and (v) the customer’s reaction to each recommendation. c. They don’t understand customer preferences. The recommendations are random. d. Both a and b. 2. Goldberg analyzed data on purchases of passenger cars in the U.S., and found that: a. the typical new car buyer values style more than fuel efficiency b. the typical new car buyer will give up 40 horsepower to increase fuel efficiency from 10-15 miles per gallon c. new car buyers are so individual that it is not possible to estimate the typical tradeoff d. none of the above 3. Use Figure 4.5 for this question. Sam’s car has horsepower equal to 120 and fuel efficiency equal to 15 mpg. If you trade his car for a car with horsepower equal to 90 and fuel efficiency equal to 30, will he agree to make the trade? Will he be willing to pay some amount of money to be able to make this trade? (We are assuming that all other characteristics of the car are equal.) a. He will not agree to make an even trade (no money changes hands on an even trade). b.
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Chap004 - Chapter 04 - Principles and Preferences Part II:...

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