(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 115

90 PART • Producers, Consumers, and Competitive Markets Frozen yogurt (cups per month) F IGURE 3.15 A U1 A CORNER SOLUTION U2 U3 When the consumer’s marginal rate of substitution is not equal to the price ratio for all levels of consumption, a corner solution arises The consumer maximizes satisfaction by consuming only one of the two goods Given budget line AB, the highest level of satisfaction is achieved at B on indifference curve U1, where the MRS (of ice cream for frozen yogurt) is greater than the ratio of the price of ice cream to the price of frozen yogurt B Ice cream (cups per month) This inequality would, of course, be reversed if the corner solution were at point A rather than B In either case, we can see that the marginal benefit–marginal cost equality that we described in the previous section holds only when positive quantities of all goods are consumed An important lesson here is that predictions about how much of a product consumers will purchase when faced with changing economic conditions depend on the nature of consumer preferences for that product and related products and on the slope of the consumer’s budget line If the MRS of ice cream for frozen yogurt is substantially greater than the price ratio, as in Figure 3.15, then a small decrease in the price of frozen yogurt will not alter the consumer’s choice; he will still choose to consume only ice cream But if the price of frozen yogurt falls far enough, the consumer could quickly choose to consume a lot of frozen yogurt E XA MPLE 3.4 CONSUMER CHOICE OF HEALTH CARE Expenditures on health care in the United States have risen dramatically over the past few decades, a phenomenon that some people find alarming Some economists have argued that these expenditures have increased so much because our health care system is inefficient That may well be, but there could also be another reason: As consumers become better off economically, their preferences shift toward health care and away from other goods After all, if you already own a nice home and two cars, what would give you more satisfaction—a third