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(consumer behavior (chapter 3

اسلاید 1: Chapter 3Consumer Behavior

اسلاید 2: Chapter 3: Consumer BehaviorSlide 2Topics to be DiscussedConsumer PreferencesBudget ConstraintsConsumer ChoiceRevealed Preferences

اسلاید 3: Chapter 3: Consumer BehaviorSlide 3Topics to be DiscussedMarginal Utility and Consumer ChoicesCost-of-Living Indexes

اسلاید 4: Chapter 3: Consumer BehaviorSlide 4Consumer BehaviorTwo applications that illustrate the importance of the economic theory of consumer behavior are:Apple-Cinnamon CheeriosThe Food Stamp Program.

اسلاید 5: Chapter 3: Consumer BehaviorSlide 5Consumer BehaviorGeneral Mills had to determine how high a price to charge for Apple-Cinnamon Cheerios before it went to the market.

اسلاید 6: Chapter 3: Consumer BehaviorSlide 6Consumer BehaviorWhen the food stamp program was established in the early 1960s, the designers had to determine to what extent the food stamps would provide people with more food and not just simply subsidize the food they would have bought anyway.

اسلاید 7: Chapter 3: Consumer BehaviorSlide 7Consumer BehaviorThese two problems require an understanding of the economic theory of consumer behavior.

اسلاید 8: Chapter 3: Consumer BehaviorSlide 8Consumer BehaviorThere are three steps involved in the study of consumer behavior.1) We will study consumer preferences.To describe how and why people prefer one good to another.

اسلاید 9: Chapter 3: Consumer BehaviorSlide 9Consumer BehaviorThere are three steps involved in the study of consumer behavior.2)Then we will turn to budget constraints.People have limited incomes.

اسلاید 10: Chapter 3: Consumer BehaviorSlide 10Consumer BehaviorThere are three steps involved in the study of consumer behavior.3) Finally, we will combine consumer preferences and budget constraints to determine consumer choices.What combination of goods will consumers buy to maximize their satisfaction?

اسلاید 11: Chapter 3: Consumer BehaviorSlide 11Consumer PreferencesA market basket is a collection of one or more commodities.One market basket may be preferred over another market basket containing a different combination of goods.Market Baskets

اسلاید 12: Chapter 3: Consumer BehaviorSlide 12Consumer PreferencesThree Basic Assumptions 1) Preferences are complete.2) Preferences are transitive.3) Consumers always prefer more of any good to less.Market Baskets

اسلاید 13: Chapter 3: Consumer BehaviorSlide 13Consumer PreferencesA2030B1050D4020E3040G1020H1040Market BasketUnits of Food Units of Clothing

اسلاید 14: Chapter 3: Consumer BehaviorSlide 14Consumer PreferencesIndifference curves represent all combinations of market baskets that provide the same level of satisfaction to a person.Indifference Curves

اسلاید 15: Chapter 3: Consumer BehaviorSlide 15The consumer prefersA to all combinationsin the blue box, whileall those in the pinkbox are preferred to A.Consumer PreferencesFood(units per week)1020304010203040Clothing(units per week)50GAEHBD

اسلاید 16: Chapter 3: Consumer BehaviorSlide 16U1Combination B,A, & Dyield the same satisfactionE is preferred to U1U1 is preferred to H & GConsumer PreferencesFood(units per week)1020304010203040Clothing(units per week)50GDAEHB

اسلاید 17: Chapter 3: Consumer BehaviorSlide 17Consumer PreferencesIndifference CurvesIndifference curves slope downward to the right.If it sloped upward it would violate the assumption that more of any commodity is preferred to less.

اسلاید 18: Chapter 3: Consumer BehaviorSlide 18Consumer PreferencesIndifference CurvesAny market basket lying above and to the right of an indifference curve is preferred to any market basket that lies on the indifference curve.

اسلاید 19: Chapter 3: Consumer BehaviorSlide 19Consumer PreferencesAn indifference map is a set of indifference curves that describes a person’s preferences for all combinations of two commodities.Each indifference curve in the map shows the market baskets among which the person is indifferent.Indifference Maps

اسلاید 20: Chapter 3: Consumer BehaviorSlide 20Consumer PreferencesIndifference CurvesFinally, indifference curves cannot cross.This would violate the assumption that more is preferred to less.

اسلاید 21: Chapter 3: Consumer BehaviorSlide 21U2U3Consumer PreferencesFood(units per week)Clothing(units per week)U1ABDMarket basket Ais preferred to B.Market basket B ispreferred to D.

اسلاید 22: Chapter 3: Consumer BehaviorSlide 22U1U2Consumer PreferencesFood(units per week)Clothing(units per week)ADBThe consumer shouldbe indifferent betweenA, B and D. However,B contains more ofboth goods than D.Indifference CurvesCannot Cross

اسلاید 23: Chapter 3: Consumer BehaviorSlide 23ABDEG-1-611-4-211Observation: The amountof clothing given up for a unit of food decreasesfrom 6 to 1Consumer PreferencesFood(units per week)Clothing(units per week)23451246810121416Question: Does thisrelation hold for givingup food to get clothing?

اسلاید 24: Chapter 3: Consumer BehaviorSlide 24Consumer PreferencesThe marginal rate of substitution (MRS) quantifies the amount of one good a consumer will give up to obtain more of another good.It is measured by the slope of the indifference curve.Marginal Rate of Substitution

اسلاید 25: Chapter 3: Consumer BehaviorSlide 25Consumer PreferencesFood(units per week)Clothing(units per week)23451246810121416ABDEG-61111-4-2-1MRS = 6MRS = 2

اسلاید 26: Chapter 3: Consumer BehaviorSlide 26Consumer PreferencesWe will now add a fourth assumption regarding consumer preference:Along an indifference curve there is a diminishing marginal rate of substitution.Note the MRS for AB was 6, while that for DE was 2.Marginal Rate of Substitution

اسلاید 27: Chapter 3: Consumer BehaviorSlide 27Consumer PreferencesQuestionWhat are the first three assumptions?Marginal Rate of Substitution

اسلاید 28: Chapter 3: Consumer BehaviorSlide 28Consumer PreferencesIndifference curves are convex because as more of one good is consumed, a consumer would prefer to give up fewer units of a second good to get additional units of the first one.Consumers prefer a balanced market basketMarginal Rate of Substitution

اسلاید 29: Chapter 3: Consumer BehaviorSlide 29Consumer PreferencesPerfect Substitutes and Perfect ComplementsTwo goods are perfect substitutes when the marginal rate of substitution of one good for the other is constant.Marginal Rate of Substitution

اسلاید 30: Chapter 3: Consumer BehaviorSlide 30Consumer PreferencesPerfect Substitutes and Perfect ComplementsTwo goods are perfect complements when the indifference curves for the goods are shaped as right angles.Marginal Rate of Substitution

اسلاید 31: Chapter 3: Consumer BehaviorSlide 31Consumer PreferencesOrange Juice(glasses)Apple Juice(glasses)234112340PerfectSubstitutes

اسلاید 32: Chapter 3: Consumer BehaviorSlide 32Consumer PreferencesRight ShoesLeftShoes234112340PerfectComplements

اسلاید 33: Chapter 3: Consumer BehaviorSlide 33Consumer PreferencesBADSThings for which less is preferred to moreExamplesAir pollutionAsbestos

اسلاید 34: Chapter 3: Consumer BehaviorSlide 34Consumer PreferencesWhat Do You Think?How can we account for Bads in the analysis of consumer preferences?

اسلاید 35: Chapter 3: Consumer BehaviorSlide 35Consumer PreferencesAutomobile executives must regularly decide when to introduce new models and how much money to invest in restyling.Designing New Automobiles (I)

اسلاید 36: Chapter 3: Consumer BehaviorSlide 36Consumer PreferencesAn analysis of consumer preferences would help to determine when and if car companies should change the styling of their cars.Designing New Automobiles (I)

اسلاید 37: Chapter 3: Consumer BehaviorSlide 37Consumer PreferencesThese consumers arewilling to give up considerablestyling for additionalperformanceStylingPerformanceConsumerPreference A:High MRS

اسلاید 38: Chapter 3: Consumer BehaviorSlide 38Consumer PreferencesThese consumers arewilling to give upconsiderableperformance for additional stylingStylingPerformanceConsumerPreference B:Low MRS

اسلاید 39: Chapter 3: Consumer BehaviorSlide 39Consumer PreferencesWhat Do You Think?How can we determine the consumers preference?Designing New Automobiles (I)

اسلاید 40: Chapter 3: Consumer BehaviorSlide 40Consumer PreferencesA recent study of automobile demand in the United States shows that over the past two decades most consumers have preferred styling over performance.Designing New Automobiles (I)

اسلاید 41: Chapter 3: Consumer BehaviorSlide 41Consumer PreferencesGrowth of Japanese Imports1970’s and 1980’s15% of domestic cars underwent a style change each yearThis compares to 23% for importsDesigning New Automobiles (I)

اسلاید 42: Chapter 3: Consumer BehaviorSlide 42Consumer PreferencesUtilityUtility: Numerical score representing the satisfaction that a consumer gets from a given market basket.

اسلاید 43: Chapter 3: Consumer BehaviorSlide 43Consumer PreferencesUtilityIf buying 3 copies of Microeconomics makes you happier than buying one shirt, then we say that the books give you more utility than the shirt.

اسلاید 44: Chapter 3: Consumer BehaviorSlide 44Consumer PreferencesUtility FunctionsAssume:The utility function for food (F) and clothing (C) U(F,C) = F + 2C Market Baskets: F units C units U(F,C) = F + 2C A 8 3 8 + 2(3) = 14 B 6 4 6 + 2(4) = 14 C 4 4 4 + 2(4) = 12 The consumer is indifferent to A & B The consumer prefers A & B to C

اسلاید 45: Chapter 3: Consumer BehaviorSlide 45Consumer PreferencesFood(units per week)10155510150Clothing(unitsper week)U1 = 25U2 = 50 (Preferred to U1)U3 = 100 (Preferred to U2)ABCAssume: U = FCMarket Basket U = FCC 25 = 2.5(10)A 25 = 5(5)B 25 = 10(2.5)Utility Functions & Indifference Curves

اسلاید 46: Chapter 3: Consumer BehaviorSlide 46Consumer PreferencesOrdinal Versus Cardinal UtilityOrdinal Utility Function: places market baskets in the order of most preferred to least preferred, but it does not indicate how much one market basket is preferred to another.Cardinal Utility Function: utility function describing the extent to which one market basket is preferred to another.

اسلاید 47: Chapter 3: Consumer BehaviorSlide 47Consumer PreferencesOrdinal Versus Cardinal RankingsThe actual unit of measurement for utility is not important.Therefore, an ordinal ranking is sufficient to explain how most individual decisions are made.

اسلاید 48: Chapter 3: Consumer BehaviorSlide 48Budget ConstraintsPreferences do not explain all of consumer behavior.Budget constraints also limit an individual’s ability to consume in light of the prices they must pay for various goods and services.

اسلاید 49: Chapter 3: Consumer BehaviorSlide 49Budget ConstraintsThe Budget LineThe budget line indicates all combinations of two commodities for which total money spent equals total income.

اسلاید 50: Chapter 3: Consumer BehaviorSlide 50Budget ConstraintsThe Budget LineLet F equal the amount of food purchased, and C is the amount of clothing.Price of food = Pf and price of clothing = PcThen Pf F is the amount of money spent on food, and Pc C is the amount of money spent on clothing.

اسلاید 51: Chapter 3: Consumer BehaviorSlide 51Budget ConstraintsThe budget line then can be written:

اسلاید 52: Chapter 3: Consumer BehaviorSlide 52Budget ConstraintsA040$80B2030$80D4020$80E6010$80G800$80Market BasketFood (F) Clothing (C)Total SpendingPf = ($1)Pc = ($2)PfF + PcC = I

اسلاید 53: Chapter 3: Consumer BehaviorSlide 53Budget Line F + 2C = $801020(I/PC) = 40Budget ConstraintsFood(units per week)406080 = (I/PF)201020300ABDEGClothing(unitsper week)Pc = $2 Pf = $1 I = $80

اسلاید 54: Chapter 3: Consumer BehaviorSlide 54Budget ConstraintsThe Budget LineAs consumption moves along a budget line from the intercept, the consumer spends less on one item and more on the other.The slope of the line measures the relative cost of food and clothing.The slope is the negative of the ratio of the prices of the two goods.

اسلاید 55: Chapter 3: Consumer BehaviorSlide 55Budget ConstraintsThe Budget LineThe slope indicates the rate at which the two goods can be substituted without changing the amount of money spent.

اسلاید 56: Chapter 3: Consumer BehaviorSlide 56Budget ConstraintsThe Budget LineThe vertical intercept (I/PC), illustrates the maximum amount of C that can be purchased with income I.The horizontal intercept (I/PF), illustrates the maximum amount of F that can be purchased with income I.

اسلاید 57: Chapter 3: Consumer BehaviorSlide 57Budget ConstraintsThe Effects of Changes in Income and PricesIncome ChangesAn increase in income causes the budget line to shift outward, parallel to the original line (holding prices constant).

اسلاید 58: Chapter 3: Consumer BehaviorSlide 58Budget ConstraintsThe Effects of Changes in Income and PricesIncome ChangesA decrease in income causes the budget line to shift inward, parallel to the original line (holding prices constant).

اسلاید 59: Chapter 3: Consumer BehaviorSlide 59Budget ConstraintsFood(units per week)Clothing(unitsper week)8012016040204060800A increase inincome shiftsthe budget lineoutward(I = $160)L2(I = $80)L1L3(I =$40)A decrease inincome shiftsthe budget lineinward

اسلاید 60: Chapter 3: Consumer BehaviorSlide 60Budget ConstraintsThe Effects of Changes in Income and PricesPrice ChangesIf the price of one good increases, the budget line shifts inward, pivoting from the other good’s intercept.

اسلاید 61: Chapter 3: Consumer BehaviorSlide 61Budget ConstraintsThe Effects of Changes in Income and PricesPrice ChangesIf the price of one good decreases, the budget line shifts outward, pivoting from the other good’s intercept.

اسلاید 62: Chapter 3: Consumer BehaviorSlide 62Budget ConstraintsFood(units per week)Clothing(unitsper week)801201604040(PF = 1)L1An increase in theprice of food to$2.00 changesthe slope of thebudget line androtates it inward.L3(PF = 2)(PF = 1/2)L2A decrease in theprice of food to$.50 changesthe slope of thebudget line androtates it outward.

اسلاید 63: Chapter 3: Consumer BehaviorSlide 63Budget ConstraintsThe Effects of Changes in Income and PricesPrice ChangesIf the two goods increase in price, but the ratio of the two prices is unchanged, the slope will not change.

اسلاید 64: Chapter 3: Consumer BehaviorSlide 64Budget ConstraintsThe Effects of Changes in Income and PricesPrice ChangesHowever, the budget line will shift inward to a point parallel to the original budget line.

اسلاید 65: Chapter 3: Consumer BehaviorSlide 65Budget ConstraintsThe Effects of Changes in Income and PricesPrice ChangesIf the two goods decrease in price, but the ratio of the two prices is unchanged, the slope will not change.

اسلاید 66: Chapter 3: Consumer BehaviorSlide 66Budget ConstraintsThe Effects of Changes in Income and PricesPrice ChangesHowever, the budget line will shift outward to a point parallel to the original budget line.

اسلاید 67: Chapter 3: Consumer BehaviorSlide 67Consumer ChoiceConsumers choose a combination of goods that will maximize the satisfaction they can achieve, given the limited budget available to them.

اسلاید 68: Chapter 3: Consumer BehaviorSlide 68Consumer ChoiceThe maximizing market basket must satisfy two conditions:1) It must be located on the budget line.2) Must give the consumer the most preferred combination of goods and services.

اسلاید 69: Chapter 3: Consumer BehaviorSlide 69Recall, the slope of an indifference curve is:Consumer ChoiceFurther, the slope of the budget line is:

اسلاید 70: Chapter 3: Consumer BehaviorSlide 70Consumer ChoiceTherefore, it can be said that satisfaction is maximized where:

اسلاید 71: Chapter 3: Consumer BehaviorSlide 71Consumer ChoiceIt can be said that satisfaction is maximized when marginal rate of substitution (of F and C) is equal to the ratio of the prices (of F and C).

اسلاید 72: Chapter 3: Consumer BehaviorSlide 72Consumer ChoiceFood (units per week)Clothing(units per week)4080202030400U1BBudget LinePc = $2 Pf = $1 I = $80Point B does not maximize satisfaction because theMRS (-(-10/10) = 1 is greater than the price ratio (1/2).-10C+10F

اسلاید 73: Chapter 3: Consumer BehaviorSlide 73Consumer ChoiceBudget LineU3DMarket basket D cannot be attainedgiven the currentbudget constraint.Pc = $2 Pf = $1 I = $80Food (units per week)Clothing(units per week)4080202030400

اسلاید 74: Chapter 3: Consumer BehaviorSlide 74U2Consumer ChoicePc = $2 Pf = $1 I = $80Budget LineAAt market basket A the budget line and theindifference curve aretangent and no higherlevel of satisfaction can be attained.At A:MRS =Pf/Pc = .5Food (units per week)Clothing(units per week)4080202030400

اسلاید 75: Chapter 3: Consumer BehaviorSlide 75Consumer ChoiceConsider two groups of consumers, each wishing to spend $10,000 on the styling and performance of cars.Each group has different preferences.Designing New Automobiles (II)

اسلاید 76: Chapter 3: Consumer BehaviorSlide 76Consumer ChoiceBy finding the point of tangency between a group’s indifference curve and the budget constraint auto companies can design a production and marketing plan.Designing New Automobiles (II)

اسلاید 77: Chapter 3: Consumer BehaviorSlide 77Designing New Automobiles (II)StylingPerformance$10,000$10,000$3,000These consumersare willing to tradeoff a considerableamount of stylingfor some additionalperformance$7,000

اسلاید 78: Chapter 3: Consumer BehaviorSlide 78Designing New Automobiles (II)Styling$10,000$10,000$3,000These consumersare willing to tradeoff a considerableamount of performance forsome additionalstyling$7,000Performance

اسلاید 79: Chapter 3: Consumer BehaviorSlide 79Consumer ChoiceChoosing between a non-matching and matching grant to fund police expendituresDecision Making & Public Policy

اسلاید 80: Chapter 3: Consumer BehaviorSlide 80Consumer ChoiceNon-matching GrantPoliceExpenditures ($)PrivateExpenditures ($)OPQU1ABefore Grant Budget line: PQA: Preference maximizing market basket ExpenditureOR: PrivateOS: PoliceRS

اسلاید 81: Chapter 3: Consumer BehaviorSlide 81VTU3U1After Grant Budget line: TVB: Preference maximizing market basket ExpenditureOU: PrivateOZ: PoliceBUZRConsumer ChoiceNon-matching GrantPPoliceExpenditures ($)PrivateExpenditures ($)OSQA

اسلاید 82: Chapter 3: Consumer BehaviorSlide 82PRU2TU1Consumer ChoiceMatching GrantPolice ($)PrivateExpenditures ($)OQSRBefore Grant Budget line: PQ A: Preference maximizing market basket After GrantC: Preference maximizing market basketExpendituresOW: PrivateOX: PoliceCXWA

اسلاید 83: Chapter 3: Consumer BehaviorSlide 83TU3U1Nonmatching GrantPoint BOU: Private expenditureOZ: Police expenditureMatching GrantPoint COW: Private expenditureOX: Police expenditureWXConsumer ChoiceMatching GrantPPolice ($)PrivateExpenditures ($)OQAU2CRBUZ

اسلاید 84: Chapter 3: Consumer BehaviorSlide 84Consumer ChoiceA corner solution exists if a consumer buys in extremes, and buys all of one category of good and none of another. This exists where the indifference curves are tangent to the horizontal and vertical axis.MRS is not equal to PA/PBA Corner Solution

اسلاید 85: Chapter 3: Consumer BehaviorSlide 85A Corner SolutionIce Cream (cup/month)FrozenYogurt(cupsmonthly)BAU2U3U1A corner solutionexists at point B.

اسلاید 86: Chapter 3: Consumer BehaviorSlide 86Consumer ChoiceA Corner SolutionAt point B, the MRS of ice cream for frozen yogurt is greater than the slope of the budget line.This suggests that if the consumer could give up more frozen yogurt for ice cream he would do so.However, there is no more frozen yogurt to give up!

اسلاید 87: Chapter 3: Consumer BehaviorSlide 87Consumer ChoiceA Corner SolutionWhen a corner solution arises, the consumer’s MRS does not necessarily equal the price ratio.In this instance it can be said that:

اسلاید 88: Chapter 3: Consumer BehaviorSlide 88Consumer ChoiceA Corner SolutionIf the MRS is, in fact, significantly greater than the price ratio, then a small decrease in the price of frozen yogurt will not alter the consumer’s market basket.

اسلاید 89: Chapter 3: Consumer BehaviorSlide 89Consumer ChoiceSuppose Jane Doe’s parents set up a trust fund for her college education.Originally, the money must be used for education.A College Trust Fund

اسلاید 90: Chapter 3: Consumer BehaviorSlide 90Consumer ChoiceIf part of the money could be used for the purchase of other goods, her consumption preferences change.A College Trust Fund

اسلاید 91: Chapter 3: Consumer BehaviorSlide 91 The trust fund shifts the budget lineConsumer ChoicePQEducation ($)OtherConsumption($)U2A College Trust FundAU1A: Consumption before the trust fundB B: Requirement that the trust fund must be spent on educationCU3C: If the trust could be spent on other goods

اسلاید 92: Chapter 3: Consumer BehaviorSlide 92Revealed PreferencesIf we know the choices a consumer has made, we can determine what her preferences are if we have information about a sufficient number of choices that are made when prices and incomes vary.

اسلاید 93: Chapter 3: Consumer BehaviorSlide 93DRevealed Preferences-- Two Budget Linesl1l2BAI1: Chose A over B A is revealed preferred to Bl2: Choose B over D B is revealed preferred to DFood (units per month)Clothing(units permonth)

اسلاید 94: Chapter 3: Consumer BehaviorSlide 94B is preferred toall market baskets in the green areaRevealed Preferences-- Two Budget Linesl2Bl1DAAll market basketsin the pinkshaded area are preferred to A.Food (units per month)Clothing(units permonth)

اسلاید 95: Chapter 3: Consumer BehaviorSlide 95All market baskets in the pink area preferred to AFood (units per month)Revealed Preferences-- Four Budget LinesClothing(units permonth)l1l2l3l4A: preferred to allmarket baskets in the green areaEBAGI3: E revealed preferred to A I4: G revealed preferred to A

اسلاید 96: Chapter 3: Consumer BehaviorSlide 96Amount of Exercise (hours)Revealed Preferences for RecreationOtherRecreationalActivities($)025507520406080100l1Cl2U2BThe rate changes to $1/hr + $30/wkNew budget line I2 & combination BReveal preference of B to AU1AScenarioRoberta’s recreation budget = $100/wkPrice of exercise = $4/hr/weekExercises 10 hrs/wk at A given U1 & I1Would the Club’s profits increase?

اسلاید 97: Chapter 3: Consumer BehaviorSlide 97Marginal utility measures the additional satisfaction obtained from consuming one additional unit of a good.Marginal Utility and Consumer ChoiceMarginal Utility

اسلاید 98: Chapter 3: Consumer BehaviorSlide 98ExampleThe marginal utility derived from increasing from 0 to 1 units of food might be 9Increasing from 1 to 2 might be 7Increasing from 2 to 3 might be 5Observation: Marginal utility is diminishingMarginal UtilityMarginal Utility and Consumer Choice

اسلاید 99: Chapter 3: Consumer BehaviorSlide 99The principle of diminishing marginal utility states that as more and more of a good is consumed, consuming additional amounts will yield smaller and smaller additions to utility.Diminishing Marginal UtilityMarginal Utility and Consumer Choice

اسلاید 100: Chapter 3: Consumer BehaviorSlide 100Marginal Utility and the Indifference CurveIf consumption moves along an indifference curve, the additional utility derived from an increase in the consumption one good, food (F), must balance the loss of utility from the decrease in the consumption in the other good, clothing (C).Marginal Utility and Consumer Choice

اسلاید 101: Chapter 3: Consumer BehaviorSlide 101Formally:Marginal Utility and Consumer Choice

اسلاید 102: Chapter 3: Consumer BehaviorSlide 102Rearranging: Marginal Utility and Consumer Choice

اسلاید 103: Chapter 3: Consumer BehaviorSlide 103Because:Marginal Utility and Consumer Choice

اسلاید 104: Chapter 3: Consumer BehaviorSlide 104When consumers maximize satisfaction the:Marginal Utility and Consumer ChoiceSince the MRS is also equal to the ratio of the marginal utilities of consuming F and C, it follows that:

اسلاید 105: Chapter 3: Consumer BehaviorSlide 105Which gives the equation for utility maximization:Marginal Utility and Consumer Choice

اسلاید 106: Chapter 3: Consumer BehaviorSlide 106Total utility is maximized when the budget is allocated so that the marginal utility per dollar of expenditure is the same for each good.This is referred to as the equal marginal principle.Marginal Utility and Consumer Choice

اسلاید 107: Chapter 3: Consumer BehaviorSlide 107In 1974 and again in 1979, the government imposed price controls on gasoline.This resulted in shortages and gasoline was rationed.Gasoline RationingMarginal Utility and Consumer Choice

اسلاید 108: Chapter 3: Consumer BehaviorSlide 108Nonprice rationing is an alternative to market rationing.Under one form everyone has an equal chance to purchase a rationed good.Gasoline is rationed by long lines at the gas pumps.Gasoline RationingMarginal Utility and Consumer Choice

اسلاید 109: Chapter 3: Consumer BehaviorSlide 109Rationing hurts some by limiting the amount of gasoline they can buy.This can be seen in the following model.It applies to a woman with an annual income of $20,000.Marginal Utility and Consumer Choice

اسلاید 110: Chapter 3: Consumer BehaviorSlide 110The horizontal axis shows her annual consumption of gasoline at $1/gallon.The vertical axis shows her remaining income after purchasing gasoline.Marginal Utility and Consumer Choice

اسلاید 111: Chapter 3: Consumer BehaviorSlide 111B20,000AGasoline(gallons per year)Spendingon othergoods ($)20,0005,000U1C15,0002,000DWith a limit of2,000 gallons,the consumer movesto a lower indifference curve(lower level of utility).18,000U2Marginal Utility and Consumer Choice

اسلاید 112: Chapter 3: Consumer BehaviorSlide 112Cost-of-Living IndexesThe CPI is calculated each year as the ratio of the cost of a typical bundle of consumer goods and services today in comparison to the cost during a base period.

اسلاید 113: Chapter 3: Consumer BehaviorSlide 113Cost-of-Living IndexesWhat Do You Think?Does the CPI accurately reflect the cost of living for retirees?Is it appropriate to use the CPI as a cost-of-living index for other government programs, for private union pensions, and for other private wage agreements?

اسلاید 114: Chapter 3: Consumer BehaviorSlide 114Cost-of-Living IndexesExampleTwo sisters, Rachel and Sarah, have identical preferences.Sarah began college in 1987 with a $500 discretionary budget. In 1997, Rachel started college and her parents promised her a budget that was equivalent in purchasing power.

اسلاید 115: Chapter 3: Consumer BehaviorSlide 115Cost-of-Living IndexesPrice of books$20/book$100/bookNumber of books156Price of food$2.00/lb.$2.20/lbPounds of food100300Expenditure$500$1,260 1987 (Sarah) 1997 (Rachel)

اسلاید 116: Chapter 3: Consumer BehaviorSlide 116Cost-of-Living IndexesRachel’ Expenditure for Equal Utility$1,260 = 300 lbs. of food x $2.20/lb. + 6 books x $100/bookSarah’ Expenditure$500 = 100 lbs. of food x $2.00/lb. + 15 books x $20/book

اسلاید 117: Chapter 3: Consumer BehaviorSlide 117Cost-of-Living IndexesThe ideal cost-of-living adjustment for Rachel is $760.The ideal cost-of-living index is $1,260/$500 = 2.52 or 252.This implies a 152% increase in the cost of living.

اسلاید 118: Chapter 3: Consumer BehaviorSlide 118For Rachel to achievethe same level of utility asSarah, with the higher prices, her budget must be sufficient to allow her to consume the bundle shown by point B.l2Bl1U1ACost-of-Living IndexesFood(lb./quarter)Books(per quarter)450252015105060050100200250300350400550500

اسلاید 119: Chapter 3: Consumer BehaviorSlide 119Cost-of-Living IndexesThe ideal cost of living index represents the cost of attaining a given level of utility at current (1997) prices relative to the cost of attaining the same utility at base (1987) prices.

اسلاید 120: Chapter 3: Consumer BehaviorSlide 120Cost-of-Living IndexesTo do this on an economy-wide basis would entail large amounts of information.Price indexes, like the CPI, use a fixed consumption bundle in the base period.Called a Laspeyres price index

اسلاید 121: Chapter 3: Consumer BehaviorSlide 121Cost-of-Living IndexesThe Laspeyres index tells us:The amount of money at current year prices that an individual requires to purchase the bundle of goods and services that was chosen in the base year divided by the cost of purchasing the same bundle at base year prices.Laspeyres Index

اسلاید 122: Chapter 3: Consumer BehaviorSlide 122Cost-of-Living IndexesCalculating Rachel’s Laspeyres cost of living index Setting the quantities of goods in 1997 equal to what were bought by her sister, but setting their prices at their 1997 levels result in an expenditure of $1,720 (100 x 2.20 + 15 x $100)

اسلاید 123: Chapter 3: Consumer BehaviorSlide 123Cost-of-Living IndexesHer cost of living adjustment would now be $1,220.The Laspeyres index is: $1,720/$500 = 344.This overstates the true cost-of-living increase.

اسلاید 124: Chapter 3: Consumer BehaviorSlide 124l2Using the Laspeyres index results in thebudget line shiftingup from I2 to I3.l3Bl1U1ACost-of-Living IndexesFood(lb./quarter)Books(per quarter)450252015105060050100200250300350400550500

اسلاید 125: Chapter 3: Consumer BehaviorSlide 125Cost-of-Living IndexesWhat Do You Think?Does the Laspeyres index always overstate the true cost-of-living index?

اسلاید 126: Chapter 3: Consumer BehaviorSlide 126Cost-of-Living IndexesYes!The Laspeyres index assumes that consumers do not alter their consumption patterns as prices change.

اسلاید 127: Chapter 3: Consumer BehaviorSlide 127Cost-of-Living IndexesYes!By increasing purchases of those items that have become relatively cheaper, and decreasing purchases of the relatively more expensive items consumers can achieve the same level of utility without having to consume the same bundle of goods.

اسلاید 128: Chapter 3: Consumer BehaviorSlide 128Cost-of-Living IndexesThe Paasche IndexCalculates the amount of money at current-year prices that an individual requires to purchase a current bundle of goods and services divided by the cost of purchasing the same bundle in the base year.

اسلاید 129: Chapter 3: Consumer BehaviorSlide 129Cost-of-Living IndexesBoth indexes involve ratios that involve today’s current year prices, PFt and PCt.However, the Laspeyres index relies on base year consumption, Fb and Cb.Whereas, the Paasche index relies on today’s current consumption, Ft and Ct .Comparing the Two Indexes

اسلاید 130: Chapter 3: Consumer BehaviorSlide 130Cost-of-Living IndexesThen a comparison of the Laspeyres and Paasche indexes gives the following equations:

اسلاید 131: Chapter 3: Consumer BehaviorSlide 131Cost-of-Living IndexesSuppose:Two goods: Food (F) and Clothing (C)Comparing the Two Indexes

اسلاید 132: Chapter 3: Consumer BehaviorSlide 132Cost-of-Living IndexesLet:PFt & PCt be current year pricesPFb & PCb be base year pricesFt & Ct be current year quantities Fb & Cb be base year quantitiesComparing the Two Indexes

اسلاید 133: Chapter 3: Consumer BehaviorSlide 133Cost-of-Living IndexesSarah (1990)Cost of base-year bundle at current prices equals $1,720 (100 lbs x $2.20/lb + 15 books x $100/book)Cost of same bundle at base year prices is $500 (100 lbs x $2.00/lb + 15 books x $20/book)Comparing the Two Indexes

اسلاید 134: Chapter 3: Consumer BehaviorSlide 134Cost-of-Living IndexesSarah (1990)Comparing the Two Indexes

اسلاید 135: Chapter 3: Consumer BehaviorSlide 135Cost-of-Living IndexesSarah (1990)Cost of buying current year bundle at current year prices is $1,260 (300 lbs x $2.20/lb + 6 books x $100/book)Cost of the same bundle at base year prices is $720 (300 lbs x $2/lb + 6 books x $20/book)Comparing the Two Indexes

اسلاید 136: Chapter 3: Consumer BehaviorSlide 136Cost-of-Living IndexesSarah (1990)Comparing the Two Indexes

اسلاید 137: Chapter 3: Consumer BehaviorSlide 137Cost-of-Living IndexesThe Paasche index will understate the cost of living because it assumes that the individual will buy the current year bundle in the base year.The Paasche Index

اسلاید 138: Chapter 3: Consumer BehaviorSlide 138Cost-of-Living IndexesIn 1995, the government adopted the chain-weighted price index to deflate its measure of real GDP.Developed to overcome problems that arose when long-term comparisons of GDP were made using fixed-weight price indexes and prices were rapidly changing.

اسلاید 139: Chapter 3: Consumer BehaviorSlide 139Cost-of-Living IndexesWhat Do You Think?What is the impact on the Federal budget of using the CPI (a Laspeyres index) to adjust social security and other programs for changes in the cost of living?The Bias of the CPI

اسلاید 140: Chapter 3: Consumer BehaviorSlide 140SummaryPeople behave rationally in an attempt to maximize satisfaction from a particular combination of goods and services.Consumer choice has two related parts: the consumer’s preferences and the budget line.

اسلاید 141: Chapter 3: Consumer BehaviorSlide 141SummaryConsumers make choices by comparing market baskets or bundles of commodities.Indifference curves are downward sloping and cannot intersect one another.Consumer preferences can be completely described by an indifference map.

اسلاید 142: Chapter 3: Consumer BehaviorSlide 142SummaryThe marginal rate of substitution of F for C is the maximum amount of C that a person is willing to give up to obtain one additional unit of F.Budget lines represent all combinations of goods for which consumers expend all their income.

اسلاید 143: Chapter 3: Consumer BehaviorSlide 143SummaryConsumers maximize satisfaction subject to budget constraints.The theory of revealed preference shows how the choices that individuals make when prices and income vary can be used to determine their preferences.

اسلاید 144: End of Chapter 3Consumer Behavior

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