chapter 11 consumer preferences and consumer choice · chapter 11 consumer preferences ... the...
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CHAPTER 11CHAPTER 11Consumer Preferences &Consumer Preferences &
Consumer ChoiceConsumer Choice
KazuKazu MatsudaMatsudaIBEC 202IBEC 202
MicroeconomicsMicroeconomics
Mapping the Utility FunctionMapping the Utility Function
• A utility functionutility function = determines a consumer’s total utility given his or her consumption bundle.
• Matsuda is a consumer who buys only two goods: chicken wings, measured in the number of orders, and fried shrimp.
Indifference curveIndifference curveAn indifference curveindifference curve = is a line that shows all the consumption bundles that yield the same amount of total utility for an individual.
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Q of Chicken Wings
Q o
f Frie
d Sh
rimp
Properties of Indifference CurvesProperties of Indifference Curves[1][1]
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rimp
Properties of Indifference CurvesProperties of Indifference Curves[2][2]
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rimp
Properties of Indifference CurvesProperties of Indifference Curves• In addition, indifference curves for most goods, called
ordinary goods, have two more properties:
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rimp
Properties of Indifference CurvesProperties of Indifference Curves• Goods that satisfy all four properties of indifference
curve maps are called ordinary goods.
Indifference Curves and Consumer ChoiceIndifference Curves and Consumer Choice•• Marginal rate of substitutionMarginal rate of substitution = Your personal
terms of the trade-off between two goods.
Marginal rate of substitution:Marginal rate of substitution:The Changing Slope of an Indifference CurveThe Changing Slope of an Indifference Curve
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Diminishing marginal rate of substitutionDiminishing marginal rate of substitutionThe flattening of indifference curves as you slide down them to the right—which reflects the same logic as the principle of diminishing marginal utility—is known as the principle of diminishing marginal rate of substitutiondiminishing marginal rate of substitution.
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f Frie
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rimps
Optimal Consumption Bundle: GeneralOptimal Consumption Bundle: General
Optimal Consumption Bundle: ExampleOptimal Consumption Bundle: ExampleUse the following numbers (same as the book):
• Matsuda’s income = $2,400 per month. • Price of Dom Perignon = $150. • Price of sushi = $30.
Optimal Consumption Bundle: ExampleOptimal Consumption Bundle: Example
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Q of Don Perignon
Q o
f Sus
hi
Preferences and ChoicesPreferences and Choices• When we say that two consumers have different preferences,
we mean that they have different utility functions. • This in turn means that they will have indifference curve
maps with different shapes. • Both of them have an income of $2,400 and face prices of
$30 per sushi and $150 per Dom Perignon.
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Using Indifference Curves: Substitutes and Using Indifference Curves: Substitutes and ComplementsComplements
• What determines whether two goods are substitutes or complements?
Perfect SubstitutesPerfect Substitutes
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epsi
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• Your income = $10• Price of Coke = $1• Price of Pepsi = $.50• Coke and Pepsi are perfect substitutes with MRS = 1. • Where is your optimal consumption bundle?
Perfect Substitutes Case
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Quantity of Coke ($1)
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• Your income = $10• Price of Coke = $.50• Price of Pepsi = $1• Coke and Pepsi are perfect substitutes with MRS = 1. • Where is your optimal consumption bundle?
Perfect Substitutes Case
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• Your income = $10• Price of Coke = $1• Price of Pepsi = $1• Coke and Pepsi are perfect substitutes with MRS = 1. • Where is your optimal consumption bundle?
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Perfect ComplementsPerfect ComplementsPerfect Complements Case
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Perfect Complements Case
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• Your income = $12• Price of Coke = $3• Price of Pepsi = $3• Peanut butter and jelly are perfect complements with 1-1 ratio. • Where is your optimal consumption bundle?
Perfect Complements Case
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Prices, Income, and DemandPrices, Income, and Demand• How would our consumption choice change if either
the prices of goods or our income change?
Use the following numbers:• Your income = $2,400 per month. • Price of Dom Perignon = $150. Rises to .Rises to .• Price of sushi = $30.
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Q of Don Perignon
Q o
f Sus
hi
Income and Consumption: Normal GoodsIncome and Consumption: Normal GoodsUse the following numbers:• Your income = $2,400 per month. Decreases to .Decreases to .• Price of Dom Perignon = $150. • Price of sushi = $30.
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Q o
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Income and Consumption: Inferior GoodsIncome and Consumption: Inferior GoodsUse the following numbers:• Your income = $2,400 per month. Decreases to .Decreases to .• Price of Dom Perignon = $150. • Price of ramen noodles = $30.
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