Theory of consumer choice

Theory of consumer choice - Principles of Microeconomics...

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The Theory of Consumer Choice Principles of Microeconomics
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1 Introduction s This topic is harder than most. s However, I believe you are up to it s And it provides great insight into consumer behavior. s You can think of it as the model for what is behind the demand curve. s As always, please interrupt me if you have any questions.
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s Remember People face tradeoffs . s For example: s Buying more of one good leaves less income to buy other goods. s Working more hours means more income and more consumption, but less leisure time. s Reducing saving allows more consumption today but reduces future consumption. s We will now explore how consumers make choices like these.
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We will start by looking at: the budget constraint and how it represent the choices a consumer can afford Next, we will show how indifference curves represent the consumer’s preferences Then, we will look at what determines how a consumer divides her resources between two goods Finally we will show how the theory of consumer choice explains decisions such as how much a consumer saves, or how much labor she supplies
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The Budget Constraint: What the Consumer Can Afford s Example: Hurley divides his income between two goods: fish and mangos. s A “consumption bundle” is a particular combination of the goods, e.g., 40 fish & 300 mangos. s Budget constraint : the limit on the consumption bundles that a consumer can afford
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GROUP PROJECT GROUP PROJECT 1 The budget constraint The budget constraint Hurley’s income: $1200 Prices: P F = $4 per fish, P M = $1 per mango A. If Hurley spends all his income on fish, how many fish does he buy? B. If Hurley spends all his income on mangos, how many mangos does he buy? C. If Hurley buys 100 fish, how many mangos can he buy? D. Plot each of the bundles from parts A C on a graph that measures fish on the horizontal axis and mangos on the vertical, connect the dots.
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Group project 1 Answers Answers A. $1200/$4 = 300 fish B. $1200/$1 = 1200 mangos C. 100 fish cost $400, $800 left buys 800 mangos Quantity of Fish Quantity of Mangos A B C D. Hurley’s budget constraint shows the bundles he can afford. D. Hurley’s budget constraint shows the bundles he can afford.
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The Slope of the Budget Constraint Quantity of Fish Quantity of Mangos D From C to D , “rise” = –200 mangos “run” = +50 fish Slope = – 4 Hurley must give up 4 mangos to get one fish. C The slope of the budget constraint equals the relative price of the good on the X axis. The slope of the budget constraint equals the relative price of the good on the X axis.
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Group Project 2 Budget constraint, Budget constraint, continued Show what happens to Hurley’s budget constraint if: A. His income falls to $800. = $2 per mango
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Theory of consumer choice - Principles of Microeconomics...

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