【正文】 re Grant ? Budget line: PQ ? A: Preference maximizing market basket After Grant ?C: Preference maximizing market basket Expenditures ?OW: Private ?OX: Police C X W A 77 Chapter 1 T U3 U1 Nonmatching Grant ?Point B ?OU: Private expenditure ?OZ: Police expenditure Matching Grant ?Point C ?OW: Private expenditure ?OX: Police expenditure W X Consumer Choice Matching Grant P Police ($) Private Expenditures ($) O Q A U2 C R B U Z 78 Chapter 1 Consumer Choice ? A 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/PB A Corner Solution 79 Chapter 1 A Corner Solution Ice Cream (cup/month) Frozen Yogurt (cups monthly) B A U2 U3 U1 A corner solution exists at point B. 80 Chapter 1 Consumer Choice ? A Corner Solution ? At 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! 81 Chapter 1 Consumer Choice ? A Corner Solution ? When a corner solution arises, the consumer’s MRS does not necessarily equal the price ratio. ? In this instance it can be said that: Y o gurtF r ozenIce CreamPPMRS /?82 Chapter 1 Consumer Choice ? 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. 83 Chapter 1 Consumer Choice ? Suppose 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 84 Chapter 1 Consumer Choice ? If part of the money could be used for the purchase of other goods, her consumption preferences change. A College Trust Fund 85 Chapter 1 The trust fund shifts the budget line Consumer Choice P Q Education ($) Other Consumption ($) U2 A College Trust Fund A U1 A: Consumption before the trust fund B B: Requirement that the trust fund must be spent on education C U3 C: If the trust could be spent on other goods 86 Chapter 1 Revealed Preferences ? If 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 ines vary. 87 Chapter 1 D Revealed Preferences Two Budget Lines l1 l2 B A I1: Chose 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) 88 Chapter 1 B is preferred to all market baskets in the green area Revealed Preferences Two Budget Lines l2 B l1 D A All market baskets in the pink shaded area are preferred to A. Food (units per month) Clothing (units per month) 89 Chapter 1 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 green area E B A G I3: E revealed preferred to A I4: G revealed preferred to A 90 Chapter 1 Amount of Exercise (hours) Revealed Preferences for Recreation Other Recreational Activities ($) 0 25 50 75 20 40 60 80 100 l1 C l2 U2 B ?The rate changes to $1/hr + $30/wk ?New budget line I2 bination B ?Reveal preference of B to A U1 A Scenario ?Roberta’s recreation budget = $100/wk ?Price of exercise = $4/hr/week ?Exercises 10 hrs/wk at A given U1 I1 Would the Club’s profits increase? 91 Chapter 1 ? Marginal utility measures the additional satisfaction obtained from consuming one additional unit of a good. Marginal Utility and Consumer Choice Marginal Utility 92 Chapter 1 ? 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 Marginal Utility Marginal Utility and Consumer Choice 93 Chapter 1 ? The 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 Utility Marginal Utility and Consumer Choice 94 Chapter 1 Example: How to allocate you last 10 weeks in preparing for the Graduate Entrance Examination? W ee k s 0 1 2 3 4 5 6 7 8Su b j e c t s 50 70 85 90 93 95 96 96 96H i g h e r M at h em at i c s 20 40 55 65 72 77 80 82 82E n g l i s h 30 45 53 58 62 65 68 70 7295 Chapter 1 ? Marginal Utility and the Indifference Curve ? If 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 96 Chapter 1 ? Formally: C)( MUF) (MU CF ????0Marginal Utility and Consumer Choice 97 Chapter 1 ? Rearranging: Marginal Utility and Consumer Choice ? ?CF MUMUFC // ????98 Chapter 1 ? Because: CF /MU MUMRS ?Marginal Utility and Consumer Choice ? ? CF MUMUFC // ???? ? ? C for F of MR SFC ???? /99 Chapter 1 ? When consumers maximize satisfaction the: CF /P PMRS ?CFC F /P P /MUMU ?Marginal Utility and Consumer Choice ? Since the MRS is also equal to the ratio of the marginal utilities