Académique Documents
Professionnel Documents
Culture Documents
65 - 79)
Market Basket A B D E G H Units of Food 20 10 40 30 10 10 Units of Clothing 30 50 20 40 20 40
Chapter 3
Chapter 3
B H A D E
40 30 20 10 10
2005 Pearson Education, Inc.
The consumer prefers A to all combinations in the yellow box, while all those in the pink box are preferred to A.
20
30
Chapter 3
40
Food
3
Chapter 3
Clothing
B H A D G E
Indifferent between points B, A, & D E is preferred to any points on the indifference curve U1 Points on U1 are preferred to H & G
U1
20
30
Chapter 3
40
Food
5
Chapter 3
Chapter 3
Chapter 3
D B A
U3 U2 U1
Food
2005 Pearson Education, Inc. Chapter 3 9
Chapter 3
10
U2
U1
A B D
B is preferred to D A is indifferent to B & D B must be indifferent to D but that cant be if B is preferred to D. A contradiction Other example: On a map, two contours never cross each other.
U2 U1
Food
Chapter 3
11
The more clothing and less food a person has, the more clothing they will give up to get more food
Chapter 3
12
A
Observation: The amount of clothing given up for 1 unit of food decreases from 6 to 1
14 12 10 8 6 4 2 1
2005 Pearson Education, Inc.
-6
1 -4
B D
1 -2 1 -1 1
G
Food
13
4
Chapter 3
Chapter 3
14
Clothing 16
14 12 10 8 6 4 2 1
2005 Pearson Education, Inc.
MRS = 6
MRS = C
-6 1 -4 1 -2 1 -1 1
B D E MRS = 2
G
Food
15
4
Chapter 3
From A to B, give up 6 clothing to get 1 food. That is, F=2-1=1, C=10-16 =-6; MRS=- C / F=6 From D to E, , give up 2 clothing to get 1 food; F=4-3=1, C=4-6 =-2; MRS =- C / F= 2
Chapter 3
16
Consumers generally prefer a balanced market basket (preference for varieties; the Doctrine of the Mean in a Chinese classic)
Chapter 3
17
Chapter 3
18
Indifference curves with different shapes imply a different willingness to substitute [That is, an indifference map is a concept to represent ones preference for market baskets.] Two polar cases are of interest
Perfect substitutes Perfect complements
Chapter 3
19
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 Find your own examples.
Chapter 3
20
Perfect Substitutes
1
Orange Juice (glasses)
21
3
Chapter 3
4 3 2 1 0 1 2 3
Chapter 3
Perfect Complements
Right Shoes
23
Chapter 3
24
Chapter 3
26
If buying 3 copies of Microeconomics makes you happier than buying one shirt, then we say that the books give you more utility than the shirt
Chapter 3
27
U(F,C) = F + 2C
A market basket with 8 units of food and 3 units of clothing gives a utility of
14 = 8 + 2(3)
Chapter 3
28
8 6 4
3 4 4
Chapter 3
30
15
Basket C A B
C
10
A B
U3 = 100 U2 = 50 U1 = 25 Food
0
2005 Pearson Education, Inc.
10
Chapter 3
15
31
Chapter 3
33
Chapter 3
34
Chapter 3
35
PF F + PC C = I
All income is allocated to food (F) and/or clothing (C)
Chapter 3
36
Example:
Assume income of $80/week, PF = $1 and PC = $2
Chapter 3
37
Chapter 3
38
(I/PC) = 40 30
A B 10 D 20 E
C 1 PF = - =Slope = F 2 PC
20
10 G
0 20 40 60
Chapter 3
80 = (I/PF)
Food
39
Chapter 3
40
Chapter 3
41
I = PX X + PY Y I PX X = PY Y I PX X =Y PY PY
2005 Pearson Education, Inc. Chapter 3 42