Chapter 11 - KW_CH11 pp 253-280 3:22 PM Page 253 > Consumer...

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chapter 253 11 Consumer Preferences and Consumer Choice >> A TALE OF TWO CITIES Spacious house in the suburbs or cozy apartment in the city—how would you choose? Ariel Skelley/Masterfile Carol Halebein for the New York Times What you will learn in this chapter: Why economists use indiffer- ence curves to illustrate a per- son’s preferences The importance of the marginal rate of substitution, the rate at which a consumer is just willing to substitute one good for another An alternative way of finding a consumer’s optimal consumption bundle using indifference curves and the budget line How the shape of indifference curves helps determine whether goods are substitutes or comple- ments An in-depth understanding of income and substitution effects O YOU WANT TO EARN A HIGH SALARY ? Maybe you should consider mov- ing to San Jose, California, the metropolitan area that contains much of Silicon Valley, America’s leading cluster of high-tech industries. The average family in San Jose has an income far higher than that of the average American family. According to, a website that compares liv- ing conditions in different cities, average household income in San Jose is more than twice as high as that in Cincinnati. But before you rush to San Jose, there’s something else you should know: housing is very expensive there—about four times as expensive per square foot of living space as in Cincinnati. Understandably, the average apartment or house in San Jose is small by American standards. So is life better or worse in San Jose than in Cincinnati? It depends a lot on what you want. For young people without children, the high wage they can earn in San Jose probably outweighs the high price of hous- ing. They are willing to accept more cramped living quarters in return for the ability to consume greater quantities of other goods such as restaurant meals or clothing. People with large families, howev- er, might prefer midwestern locations like Cincinnati, where the average wage is lower than in San Jose but a dollar buys many more square feet of living space. That is, they would choose to eat fewer restaurant meals but live in more spacious housing. For individuals whose preferences lie somewhere between those of childless yuppies and those of proud parents, the choice between San Jose and Cincinnati may not be easy. In fact, some people would be indifferent between living in the two locations. That’s not to say that they would live the same way in San Jose and in Cincinnati; in San Jose they would live in small apartments and eat out a lot, but in Cincinnati they would be homebodies. D KW_CH11 pp 253-280 9/3/04 3:22 PM Page 253
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254 PART 5 THE CONSUMER Mapping the Utility Function In Chapter 10 we introduced the concept of a utility function, which determines a con- sumer’s total utility given his or her consumption bundle. In Figure 10-1 we saw how Cassie’s total utility changed as we changed the quantity of fried clams consumed, hold- ing fixed the quantities of other items in her bundle. That is, in Figure 10-1 we showed
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Chapter 11 - KW_CH11 pp 253-280 3:22 PM Page 253 > Consumer...

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