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【正文】 instance it can be said that: Y o g u r tFr o z e nI c e C r e a mPPM R S ?Chapter 3 89 169。2020 Pearson Education, Inc. A Corner Solution ?If 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 Chapter 3 90 169。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. A Corner Solution Example ?Original budget line, PQ, with a market basket, A, of education and other goods ?Trust fund shifts out the budget line as long as trust fund, PB, is spent on education ?Jane increases satisfaction, moving to higher indifference curve, U2 Chapter 3 92 169。2020 Pearson Education, Inc. A Corner Solution Example P Q Education ($) Other Consumption ($) U2 A U1 B ?Jane better off on U2 ?B is corner solution ?MRS ≠ PE/POG Chapter 3 93 169。2020 Pearson Education, Inc. A Corner Solution Example P Q Education ($) Other Consumption ($) U2 A U1 B ?If gift is unrestricted, Jane can be at point C on U3 ?Better off than with restricted gift Chapter 3 94 169。2020 Pearson Education, Inc. Revealed Preferences ?If we know the choices a consumer has made, we can determine what their preferences are if we have information about a sufficient number of choices that are made when prices and ines vary. Chapter 3 95 169。2020 Pearson Education, Inc. Revealed Preferences – Two Budget Lines l1 l2 B A ?I1: Choose A over B ?A is revealed preferred to B ?l2: Choose B over D ?B is revealed preferred to D Food (units per month) Clothing (units per month) D Chapter 3 96 169。2020 Pearson Education, Inc. Revealed Preferences – Two Budget Lines l1 l2 B A Food (units per month) Clothing (units per month) D All market baskets in the pink shaded area are preferred to A. B is preferred to all market baskets in the yellow area Chapter 3 97 169。2020 Pearson Education, Inc. Revealed Preference ?As you continue to change the budget line, individuals can tell you which basket they prefer to others ?The more the individual reveals, the more you can discern about their preferences ?Eventually you can map out an indifference curve Chapter 3 98 169。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. Marginal Utility and Consumer Choice ?Marginal utility measures the additional satisfaction obtained from consuming one additional unit of a good ?How much happier is the individual from consuming one more unit of food? Chapter 3 100 169。2020 Pearson Education, Inc. Marginal Utility Example ?The marginal utility derived from increasing from 0 to 1 units of food might be 9 ?Increasing from 1 to 2 might be 7 ?Increasing from 2 to 3 might be 5 ?Observation: Marginal utility is diminishing as consumption increases Chapter 3 101 169。2020 Pearson Education, Inc. Marginal Utility ?The principle of diminishing marginal utility states that as more of a good is consumed, the additional utility the consumer gains will be smaller and smaller ?Note that total utility will continue to increase since consumer makes choices that make them happier Chapter 3 102 169。2020 Pearson Education, Inc. Marginal Utility and Indifference Curves ?As consumption moves along an indifference curve: ?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) Chapter 3 103 169。2020 Pearson Education, Inc. Marginal Utility and Consumer Choice ?Formally: C)( M UF ) (MU CF ????0No change in total utility along an indifference curve. Trade off of one good to the other leaves the consumer just as well off. Chapter 3 104 169。2020 Pearson Education, Inc. Marginal Utility and Consumer Choice ?Rearranging: ? ?? ?CFCF/ M U M UM R S s a yc a n WeC f o r F of M R SFCS i n c eMUMUFC?????????///Chapter 3 105 169。2020 Pearson Education, Inc. Marginal Utility and Consumer Choice ?When consumers maximize satisfaction: CF /P PM R S ?CF CF /P P / M UMU ?Since the MRS is also equal to the ratio of the marginal utility of consuming F and C Chapter 3 106 169。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. Marginal Utility and Consumer Choice ?Total 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. Chapter 3 108 169。2020 Pearson Education, Inc. CostofLiving Indexes ?Social Security payments are given to qualifying individuals ?Each year the benefit increases equal to the rate of increase of the Consumer Price Index (CPI) ?Ratio of the present cost of typical bundle of goods/services in parison to the cost during a base period Chapter 3 109 169。2020 Pearson Education, Inc. CostofLiving Indexes ?Does the CPI give a good measure of inflation and therefore a measure of the cost of living changes? ?Should the CPI be used to measure how much cost of living has incre