CHAPTER 11 Consumer Preferences & Consumer Choice. Kazu Matsuda IBEC 202 Microeconomics

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1 CHAPTER 11 Consumer Preferences & Consumer Choice Kazu Matsuda IBEC 22 Microeconomics

2 Mapping the Utility Function A utility function = determines a consumer s total utility given his or her consumption bundle. Matsuda is a consumer who buys only two goods: chicken wings, measured in the number of orders, and fried shrimp.

3 Indifference curve An indifference curve = is a line that shows all the consumption bundles that yield the same amount of total utility for an individual Q of Fried Shrimp Q of Chicken Wings

4 [1] Properties of Indifference Curves Q of Fried Shrimp Q of Chicken Wings

5 [2] Properties of Indifference Curves Q of Fried Shrimp Q of Chicken Wings

6 Properties of Indifference Curves In addition, indifference curves for most goods, called ordinary goods, have two more properties: Q of Fried Shrimp Q of Chicken Wings

7 Properties of Indifference Curves Goods that satisfy all four properties of indifference curve maps are called ordinary goods. Indifference Curves and Consumer Choice Marginal rate of substitution = Your personal terms of the trade-off between two goods.

8 Marginal rate of substitution: The Changing Slope of an Indifference Curve Q of Fried Shrimps Q of Chicken Wings

9 Diminishing marginal rate of substitution The flattening of indifference curves as you slide down them to the right which reflects the same logic as the principle of diminishing marginal utility is known as the principle of diminishing marginal rate of substitution. Q of Fried Shrimps Q of Chicken Wings

10 Optimal Consumption Bundle: General

11 Optimal Consumption Bundle: Example Use the following numbers (same as the book): Matsuda s income = $2,4 per month. Price of Dom Perignon = $15. Price of sushi = $3.

12 Optimal Consumption Bundle: Example Q of Sushi Q of Don Perignon

13 Preferences and Choices When we say that two consumers have different preferences, we mean that they have different utility functions. This in turn means that they will have indifference curve maps with different shapes. Both of them have an income of $2,4 and face prices of $3 per sushi and $15 per Dom Perignon Q of Sushi 5 4 Q of Sushi Q of Don Perignon Q of Don Perignon

14 Using Indifference Curves: Substitutes and Complements What determines whether two goods are substitutes or complements? Perfect Substitutes Quantity of Pep si Quantity of Pep si Quantity of Coke Quantity of Coke

15 Your income = $1 Price of Coke = $1 Price of Pepsi = $.5 Coke and Pepsi are perfect substitutes with MRS = 1. Where is your optimal consumption bundle? Perfect Substitutes Case Quantity of Pepsi ($.5) Quantity of Coke ($1)

16 Your income = $1 Price of Coke = $.5 Price of Pepsi = $1 Coke and Pepsi are perfect substitutes with MRS = 1. Where is your optimal consumption bundle? Perfect Substitutes Case Quantity of Pepsi ($1) Quantity of Coke ($.5)

17 Your income = $1 Price of Coke = $1 Price of Pepsi = $1 Coke and Pepsi are perfect substitutes with MRS = 1. Where is your optimal consumption bundle? 12 1 Quantity of Pepsi Quantity of Coke

18 Perfect Complements Perfect Complements Case Perfect Complements Case Quantity of Jelley 3 2 Quantity of Jelley Quantity of Peanut Butter Quantity of Peanut Butter

19 Your income = $12 Price of Coke = $3 Price of Pepsi = $3 Peanut butter and jelly are perfect complements with 1-1 ratio. Where is your optimal consumption bundle? Perfect Complements Case 6 5 Quantity of Jelley Quantity of Peanut Butter

20 Prices, Income, and Demand How would our consumption choice change if either the prices of goods or our income change?

21 Use the following numbers: Your income = $2,4 per month. Price of Dom Perignon = $15. Rises to. Price of sushi = $ Q of Sushi Q of Don Perignon

22 Income and Consumption: Normal Goods Use the following numbers: Your income = $2,4 per month. Decreases to. Price of Dom Perignon = $15. Price of sushi = $ Q of Sushi Q of Don Perignon

23 Income and Consumption: Inferior Goods Use the following numbers: Your income = $2,4 per month. Decreases to. Price of Dom Perignon = $15. Price of ramen noodles = $ Q of Sushi Q of Don Perignon

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