CHAPTER • Consumer Behavior 89 Explorer users, would prefer cars with $2500 worth of acceleration and $7500 worth of size.7 We have simplified matters for this example by considering only two attributes In practice, an automobile company will use marketing and statistical studies to learn how different groups of consumers value a broad set of attributes Combined with information about how these attributes will affect manufacturing costs, the company can design a production and marketing plan In the context of our example, one potentially profitable option is to appeal to both groups of consumers by manufacturing a model emphasizing acceleration to a slightly lesser degree than preferred by those in Figure 3.14 (a) A second option is to produce a relatively large number of cars that emphasize size and a smaller number emphasizing acceleration Knowledge about the preferences of each group (i.e., the actual indifference curves), along with information about the number of consumers in each, would help the firm make a sensible business decision In fact, an exercise similar to the one we’ve described here was carried out by General Motors in a survey of a large number of automobile buyers.8 Some of the results were expected For example, households with children tended to prefer functionality over style and so tended to buy minivans rather than sedans and sporty cars Rural households, on the other hand, tended to purchase pickups and allwheel drives More interesting was the strong correlation between age and attribute preferences Older consumers tended to prefer larger and heavier cars with more safety features and accessories (e.g., power windows and steering) Further, younger consumers preferred greater horsepower and more stylish cars Corner Solutions Sometimes consumers buy in extremes, at least within categories of goods Some people, for example, spend no money on travel and entertainment Indifference curve analysis can be used to show conditions under which consumers choose not to consume a particular good In Figure 3.15, a man faced with budget line AB for snacks chooses to purchase only ice cream (IC) and no frozen yogurt (Y) This decision reflects what is called a corner solution When one of the goods is not consumed, the consumption bundle appears at the corner of the graph At B, which is the point of maximum satisfaction, the MRS of ice cream for frozen yogurt is greater than the slope of the budget line This inequality suggests that if the consumer had more frozen yogurt to give up, he would gladly trade it for additional ice cream At this point, however, our consumer is already consuming all ice cream and no frozen yogurt, and it is impossible to consume negative amounts of frozen yogurt When a corner solution arises, the consumer’s MRS does not necessarily equal the price ratio Unlike the condition expressed in equation (3.3), the necessary condition for satisfaction to be maximized when choosing between ice cream and frozen yogurt in a corner solution is given by the following inequality.9 MRS Ú PIC/PY (3.4) The first set of indifference curves for the Ford Mustang coupe will be of the following form: U (level of utility) ϭ b0 (constant) ϩ b1 *S (space in cubic feet) * b2*S2 ϩ b3*H (horsepower) ϩ b4*H2 ϩ b5*O (a list of other attributes) Each indifference curve represents the combinations of S and H that generate the same level of utility The comparable relationship for the Ford Explorer will have the same form, but different b’s The survey design and the results are described in Steven Berry, James Levinsohn, and Ariel Pakes, “Differentiated Products Demand Systems from a Combination of Micro and Macro Data: The New Car Market,” Journal of Political Economy, 112 (February 2004): 68–105 Strict equality could hold if the slope of the budget constraint happened to equal the slope of the indifference curve—a condition that is unlikely • corner solution Situation in which the marginal rate of substitution of one good for another in a chosen market basket is not equal to the slope of the budget line