Chapter 3
Consumer Behavior
Questions for Review
1. What are the four basic assumptions about individual preferences? Explain the significance or
meaning of each.
(1) Preferences are complete: this means that the consumer is able to compare and rank all possible
baskets of goods and rvices. (2) Preferences are transitive: this means that preferences are consistent, in the n that if bundle A is preferred to bundle B and bundle B is preferred to bundle C, then bundle
A is preferred to bundle C. (3) More is preferred to less: this means that all goods are desirable, and
that the consumer always prefers to have more of each good. (4) Diminishing marginal rate of
substitution: this means that indifference curves are convex, and that the slope of the indifference curv
e increas (becomes less negative) as we move down along the curve. As a consumer moves down along her indifference curve she is willing to give up fewer units of the good on the vertical axis in exchange for one more unit of the good on the horizontal axis. This assumption also means that balanced market baskets are generally preferred to baskets that have a lot of one good and very little of the other good.
2. Can a t of indifference curves be upward sloping? If so, what would this tell you about the
two goods?
A t of indifference curves can be upward sloping if we violate assumption number three: more is
preferred to less. When a t of indifference curves is upward sloping, it means one of the goods is a “bad” so that the consumer pref ers less of that good rather than more. The positive slope means that the consumer will accept more of the bad only if he also receives more of the other good in return. As we move up along the indifference curve the consumer has more of the good he likes, and also more of the good he does not like.
3. Explain why two indifference curves cannot interct.
The figure below shows two indifference curves intercting at point A. We know from the definition of an indifference curve that the consumer has the same level of utility for every bundle of goods that lies on the given curve. In this ca, the consumer is indifferent between bundles A and B becau they both lie on indifference curve U1. Similarly, the consumer is indifferent between bundles A and C becau they both lie on indifference curve U2. By the transitivity of preferences this consumer should also be indifferent between C and B. However, we e from the graph that C lies above B, so C must be preferred to B becau C contains more of Good Y and the same amount of Good X as does B, and more is preferred to less. But this violates transitivity, so indifference curves must not interct.
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32 Pindyck/Rubinfeld, Microeconomics, Eighth Edition
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Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
4. Jon is always willing to trade one can of Coke for one can of Sprite, or one can of Sprite for one
can of Coke.
a. What can you say about Jon’s marginal rate of substitution?
Jon’s marginal rate of substitution can be defined as the number of cans of Coke he would be
willing to give up in exchange for a can of Sprite. Since he is always willing to trade one for one, his MRS is equal to 1.
b. Draw a t of indifference curves for Jon.
Since Jon is always willing to trade one can of Coke for one can of Sprite, his indifference curves are linear with a slope of -1. See the diagrams below part c.
c. Draw two budget lines with different slopes and illustrate the satisfaction-maximizing choice.
What conclusion can you draw?
J on’s indifference curves are linear with a slope of -1. Jon’s budget line is also linear, and will have a slope that reflects the ratio of the two prices. If Jon’s budget line is steeper than his indifference curves, he will choo to consume only the good on the vertical axis. If Jon’s budget line is flatter than his indifference curves, he will choo to consume only the good on the horizontal axis. Jon will always choo a corner solution where he buys only the less expensive good, unless his budget line has the same slope as his indifference curves. In this ca any combination of Sprite and Coke
短篇爱情故事that us up his entire income will maximize Jon’s satisfaction.
The diagrams below show cas where Jon’s budget line is steeper than his indifference curves
and where it is flatter. Jon’s indifference curves are linear with slopes of -1, and four indifference
curves are shown in each diagram as solid lines. Jon’s budget is $4.00. In the diagram on the left, Coke costs $1.00 and Sprite costs $2.00, so Jon can afford 4 Cokes (if he spends his entire budget on Coke) or 2 Sprites (if he spends his budget on Sprite). His budget line is the dashed line. The
highest indifference curve he can reach is the one furthest to the right. He can reach that level of
utility by purchasing 4 Cokes and no Sprites. In the diagram on the right, the price of Coke is $2.00 a
nd the price of Sprite is $1.00. Jon’s budget line is now flatter than his indifference curves, and
his optimal bundle is the corner solution with 4 Sprites and no Cokes.
Chapter 3Consumer Behavior33
5. What happens to the marginal rate of substitution as you move along a convex indifference描写喷泉的句子
curve? A linear indifference curve?
The MRS measures how much of a good you are willing to give up in exchange for one more unit of the other good, keeping utility constant. The MRS diminishes along a convex indifference curve.
This occurs becau as you move down along the indifference curve, you are willing to give up less and less of the good on the vertical axis in exchange for one more unit of the good on the horizontal axis. The MRS is also the negative of the slope of the indifference curve, which decreas (becomes clor to zero) as you move down along the indifference curve. The MRS is constant along a linear indifference curve becau the slope does not change. The consumer is always willing to trade the same number of units of one good in exchange for the other.
6. Explain why an MRS between two goods must equal the ratio of the price of the goods for the
consumer to achieve maximum satisfaction.
The MRS describes the rate at which the consumer is willing to trade off one good for another to maintain the same level of satisfaction. The ratio of prices describes the trade-off that the consumer is able to make between the same two goods in the market. The tangency of the indifference curve with the budget line reprents the point at which the trade-offs are equal and consumer satisfaction is maximized. If the MRS between two goods is not equal to the ratio of prices, then the consumer c
ould trade one good for another at market prices to obtain higher levels of satisfaction. For example, if the slope of the budget line (the ratio of the prices) is 4, the consumer can trade 4 units of Y
(the good on the vertical axis) for one unit of X (the good on the horizontal axis). If the MRS at the current bundle is 6, then the consumer is willing to trade 6 units of Y for one unit of X. Since the two slopes are not equal the consumer is not maximizing her satisfaction. The consumer is willing to trade 6 but only has to trade 4, so she should make the trade. This trading continues until the highest level of satisfaction is achieved. As trades are made, the MRS will change and eventually become equal to the price ratio.
7. Describe the indifference curves associated with two goods that are perfect substitutes. What if
they are perfect complements?
Two goods are perfect substitutes if the MRS of one for the other is a constant number. In this ca, the slopes of the indifference curves are constant, and the indifference curves are therefore linear. If two goods are perfect complements, the indifference curves are L-shaped. In this ca the consumer wants to consume the two goods in a fixed proportion, say one unit of good 1 for every one unit of good 2. If she has more of one good than the other, she does not get any extra satisfactio
n from the additional units of the first good.
8. What is the difference between ordinal utility and cardinal utility? Explain why the assumption
of cardinal utility is not needed in order to rank consumer choices.
Ordinal utility implies an ordering among alternatives without regard for intensity of preference. For example, if the c onsumer’s first choice is preferred to his cond choice, then utility from the first
34Pindyck/Rubinfeld, Microeconomics,Eighth Edition
choice will be higher than utility from the cond choice. How much higher is not important. An ordinal utility function generates a ranking of bundles and no meaning is given to the magnitude of the utility number itlf. Cardinal utility implies that the intensity of preferences may be quantified, and that the utility number itlf has meaning. An ordinal ranking is all that is needed to rank consumer choices. It is not necessary to know how intenly a consumer prefers basket A over basket B; it is enough to know that A is preferred to B.
9. Upon merging with the West German economy, East German consumers indicated a preference
for Mercedes-Benz automobiles over Volkswagens. However, when they converted their savings into deutsche marks, they flocked to Volkswagen dealerships. How can you explain this
apparent paradox?
There is no paradox. Preferences do not involve prices, and East German consumers preferred
Mercedes bad solely on product characteristics. However, Mercedes prices are considerably
higher than Volkswagen prices. So, even though East German consumers preferred a Mercedes to a Volkswagen, they either could not afford a Mercedes or they preferred a bundle of other goods plus a Volkswagen to a Mercedes alone. While the marginal utility of consuming a Mercedes exceeded the marginal utility of consuming a Volkswagen, East German consumers considered the marginal utility per dollar for each good and, for most of them, the marginal utility per dollar was higher for
团队口号大全Volkswagens. As a result, they flocked to Volkswagen dealerships to buy VWs.
10. Draw a budget line and then draw an indifference curve to illustrate the satisfaction-
maximizing choice associated with two products. U your graph to answer the following
questions.
电影四渡赤水a. Suppo that one of the products is rationed. Explain why the consumer is likely to be
wor off.轻快的歌曲
When goods are not rationed, the consumer is able to choo the satisfaction-maximizing bundle where the slope of the budget line is equal to the slope of the indifference curve, or the price ratio is equal to the MRS. This is point A in the diagram below where the consumer buys G1 of good 1 and G2 of good 2 and achieves utility level U2. If good 1 is now rationed at G* the consumer will no longer be able to attain the utility maximizing point. He or she cannot purcha amounts of
good 1 exceeding G*. As a result, the consumer will have to purcha more of the other
good instead. The highest utility level the consumer can achieve with rationing is U1 at point B.
This is not a point of tangency, and the consumer’s utility is lower than at point A, so the
consumer is wor off as a result of rationing.
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Chapter 3Consumer Behavior35
b. Suppo that the price of one of the products is fixed at a level below the current price. As a
result, the consumer is not able to purcha as much as she would like. Can you tell if the
consumer is better off or wor off?
No, the consumer could be better off or wor off. When the price of one good is fixed at a
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level below the current (equilibrium) price, there will be a shortage of that good, and the good
will be effectively rationed. In the diagram below, the price of good 1 has been reduced, and the
consumer’s budget line has rotated out to the right. The consumer would like to purcha bundle B, but the amount of good 1 is restricted becau of a shortage. If the most the consumer can purcha is G*, she will be exactly as well off as before, becau she will be able to purcha bundle C on her original indifference curve. If there is more than G* of good 1 available, the consumer will be
better off, and if there is less than G*, the consumer will be wor off.
11. Describe the equal marginal principle. Explain why this principle may not hold if increasing
marginal utility is associated with the consumption of one or both goods.
The equal marginal principle states that to obtain maximum satisfaction the ratio of the marginal utilit
y to price must be equal across all goods. In other words, utility maximization is achieved when the budget is allocated so that the marginal utility per dollar of expenditure (MU/P) is the same for each good. If the MU/P ratios are not equal, allocating more dollars to the good with the higher MU/P will increa utility. As more dollars are allocated to this good its marginal utility will decrea,
税收政策which caus its MU/P to fall and ultimately equal that of the other goods.
If marginal utility is increasing, however, allocating more dollars to the good with the larger MU/P caus MU to increa, and that good’s MU/P just keeps getting larger and larger. In this ca, the
