【正文】 2020 Pearson Education, Inc. Marginal Utility and Consumer Choice ?Rearranging, gives the equation for utility maximization: CCFF PMUPMU // ?Chapter 3 107 169。2020 Pearson Education, Inc. All market baskets in the pink area preferred to A Food (units per month) Revealed Preferences – Four Budget Lines Clothing (units per month) l1 l2 l3 l4 A: preferred to all market baskets in the yellow area E B A G I3: E revealed preferred to A I4: G revealed preferred to A Chapter 3 99 169。2020 Pearson Education, Inc. A Corner Solution Example ?Suppose Jane Doe’s parents set up a trust fund for her college education ?The money must be used only for education ?Although a wele gift, an unrestricted gift might be better Chapter 3 91 169。2020 Pearson Education, Inc. Consumer Choice: An Application Revisited Styling Performance $10,000 $10,000 These consumers want performance worth $7000 and styling worth $3000 $3,000 $7,000 Chapter 3 83 169。2020 Pearson Education, Inc. Consumer Choice ?Therefore, it can be said at consumer’s optimal consumption point, CFPPMRS ?Chapter 3 76 169。2020 Pearson Education, Inc. The Budget Line Changes ?The Effects of Changes in Prices ?If the two goods increase in price, but the ratio of the two prices is unchanged, the slope will not change ?However, the budget line will shift inward parallel to the original budget line Chapter 3 68 169。2020 Pearson Education, Inc. Budget Constraints ?The Budget Line ?The vertical intercept, I/PC, illustrates the maximum amount of C that can be purchased with ine I ?The horizontal intercept, I/PF, illustrates the maximum amount of F that can be purchased with ine I Chapter 3 60 169。2020 Pearson Education, Inc. The Budget Line ?Let F equal the amount of food purchased, and C is the amount of clothing ?Price of food = PF and price of clothing = PC ?Then PFF is the amount of money spent on food, and PCC is the amount of money spent on clothing Chapter 3 52 169。 B and prefers both to C Chapter 3 44 169。2020 Pearson Education, Inc. Consumer Preferences: An Application ?An analysis of consumer preferences would help to determine where to spend more on change: performance or styling ?Some consumers will prefer better styling and some will prefer better performance Chapter 3 37 169。2020 Pearson Education, Inc. Marginal Rate of Substitution ?Indifference curves with different shapes imply a different willingness to substitute ?Two polar cases are of interest ?Perfect substitutes ?Perfect plements Chapter 3 29 169。2020 Pearson Education, Inc. Indifference Maps Food Clothing ?B is preferred to D ?A is indifferent to B amp。2020 Pearson Education, Inc. ?Indifferent between points B, A, amp。2020 Pearson Education, Inc. Consumer Preferences ?How might a consumer pare different groups of items available for purchase? ?A market basket is a collection of one or more modities ?Individuals can choose between market baskets containing different goods Chapter 3 9 169。Chapter 3 Consumer Behavior Chapter 3 2 169。2020 Pearson Education, Inc. Consumer Preferences – Basic Assumptions 1. Preferences are plete ? Consumers can rank market baskets 2. Preferences are transitive ? If they prefer A to B, and B to C, they must prefer A to C 3. Consumers always prefer more of any good to less ? More is better Chapter 3 10 169。 D ?E is preferred to points on U1 ?Points on U1 are preferred to H amp。 D ?B must be indifferent to D but that can’t be if B is preferred to D U1 U1 U2 U2 A B D Chapter 3 22 169。2020 Pearson Education, Inc. Marginal Rate of Substitution ?Perfect Substitutes ?Two goods are perfect substitutes when the marginal rate of substitution of one good for the other is constant ?Example: a person might consider apple juice and orange juice perfect substitutes ? They would always trade 1 glass of OJ for 1 glass of Apple Juice Chapter 3 30 169。2020 Pearson Education, Inc. Consumer Preferences: An Application These consumers place a greater value on performance than styling Styling Performance Chapter 3 38 169。2020 Pearson Education, Inc. Utility Example ?Baskets for each level of utility can be plotted to get an indifference curve ?To find the indifference curve for a utility of 14, we can change the binations of food and clothing that give us a utility of 14 Chapter 3 45 169。2020 Pearson Education, Inc. ICPFP CF ??The Budget Line ?The budget line then can be written: All ine is allocated to food (F) and/or clothing (C) Chapter 3 53 169。2020 Pearson Education, Inc. The Budget Line ?As we know, ine and prices can change ?As ines and prices change, there are changes in budget lines ?We can show the effects of these changes on budget lines and consumer choices Chapter 3 61 169。2020 Pearson Education, Inc. The Budget Line Changes ?The Effects of Changes in Prices ?If the two goods decrease in price, but the ratio of the two prices is unchanged, the slope will not change ?However, the budget line will shift outward parallel to the original budget line Chapter 3 69 169。2020 Pearson Education, Inc. Consumer Choice ?It 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) ?Note this is ONLY true at the optimal consumption point Chapter 3 77 169。2020 Pearson Education, Inc. Consumer Choice: An Application Revisited These consumers want styling worth $7000 and performance worth $3000 $3,000 $7,000 Styling $10,000 $10,000 Performance Chapter 3 84 169。2020 Pearson Education, Inc. A Corner Solution Example ?Original budget line, PQ, with a market basket, A, of education and other goods ?Trust fund sh