Chapter 21

Chapter 21 - Chapter 21 The Theory of Consumer Choice The...

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Chapter 21 The Theory of Consumer Choice
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The Budget Constraint: What the Consumer Can Afford The budget constraint depicts the limit on the consumption “bundles” that a consumer can afford. The budget constraint shows the various combinations of goods the consumer can afford given his or her income and the prices of the two goods.
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The Consumer’s Budget Constraint
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The Consumer’s Budget Constraint Quantity of Pizza Quantity of Pepsi 0 Consumer’s budget constraint 500 B 100 A
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The Budget Constraint: What the Consumer Can Afford The slope of the budget constraint line equals the relative price of the two goods, that is, the price of one good compared to the price of the other . It measures the rate at which the consumer can trade one good for the other.
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Preferences: What the Consumer Wants A consumer’s preference among consumption bundles may be illustrated with indifference curves. An indifference curve is a curve that shows consumption bundles that give the consumer the same level of satisfaction.
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The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Indifference curve, I 1 I 2 C B A D
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Representing Preferences with Indifference Curves The Marginal Rate of Substitution The slope at any point on an indifference curve is the marginal rate of substitution . It is the rate at which a consumer is willing to trade one good for another. It is the amount of one good that a consumer requires as compensation to give up one unit of the other good.
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The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Indifference curve, I 1 I 2 1 MRS C B A D
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Four Properties of Indifference Curves Property 1: Higher indifference curves are preferred to lower ones. Consumers usually prefer more of something to less of it. Higher indifference curves represent larger quantities of goods than do lower indifference curves.
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The Consumer’s Preferences Quantity of Pizza Quantity of Pepsi 0 Indifference curve, I 1 I 2 C B A D
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Four Properties of Indifference Curves Property 2: Indifference curves are downward sloping. A consumer is willing to give up one good only if he or she gets more of the other good in order to remain equally happy.
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Chapter 21 - Chapter 21 The Theory of Consumer Choice The...

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