CHAPTER • Consumer Behavior 93 We can if we have information about a sufficient number of choices that have been made when prices and income levels varied The basic idea is simple If a consumer chooses one market basket over another, and if the chosen market basket is more expensive than the alternative, then the consumer must prefer the chosen market basket Suppose that an individual, facing the budget constraint given by line l1 in Figure 3.18, chooses market basket A Let’s compare A to baskets B and D Because the individual could have purchased basket B (and all baskets below line l1) and did not, we say that A is preferred to B It might seem at first glance that we cannot make a direct comparison between baskets A and D because D is not on l1 But suppose the relative prices of food and clothing change, so that the new budget line is l2 and the individual then chooses market basket B Because D lies on budget line l2 and was not chosen, B is preferred to D (and to all baskets below line l2) Because A is preferred to B and B is preferred to D, we conclude that A is preferred to D Furthermore, note in Figure 3.18 that basket A is preferred to all of the baskets that appear in the green-shaded areas However, because food and clothing are “goods” rather than “bads,” all baskets that lie in the pink-shaded area in the rectangle above and to the right of A are preferred to A Thus, the indifference curve passing through A must lie in the unshaded area Given more information about choices when prices and income levels vary, we can get a better fix on the shape of the indifference curve Consider Figure 3.18 Suppose that facing line l3 (which was chosen to pass through A), the individual chooses market basket E Because E was chosen even though A was equally expensive (it lies on the same budget line), E is preferred to A, as are all points in the rectangle above and to the right of E Now suppose that facing line l4 (which passes through A), the individual chooses market basket G Because G was chosen and A was not, G is preferred to A, as are all market baskets above and to the right of G We can go further by making use of the assumption that indifference curves are convex In that case, because E is preferred to A, all market baskets above and to the right of line AE in Figure 3.19 must be preferred to A Otherwise, the indifference curve passing through A would have to pass through a point above Clothing (units per month) l1 F IGURE 3.18 REVEALED PREFERENCE: TWO BUDGET LINES l2 A B D Food (units per month) If an individual facing budget line l1 chose market basket A rather than market basket B, A is revealed to be preferred to B Likewise, the individual facing budget line l2 chooses market basket B, which is then revealed to be preferred to market basket D Whereas A is preferred to all market baskets in the green-shaded area, all baskets in the pinkshaded area are preferred to A