bài giảng kinh tế vi mô tiếng anh ch4 consumer choice

1 Chapter 4 Consumer Choice Key issues 1. properties of preferences 2. utility 3. budget constraint 4. consumer's constrained choice Tastes • individual tastes (preferences) determine pleasure people derive from goods • economists usually • take tastes as given • do not judge taste Individual decision making • consumers face constraints on their choices • consumers maximize their pleasure from consumption subject to constraints • we want to predict behavior not judge i Consumer’s problem • consumer allocates money over goods: buys a bundle or market basket of goods • 2 possible theories of consumer behavior • maximizing behavior • random behavior (next chapter) Assumptions about consumer preferences 1. completeness 2. transitivity 3. more is better 2 Assumption 1: Completeness • consumer can rank any two bundles of goods • only one of following is true: consumer • prefers Bundle x to Bundle y • prefers Bundle y to Bundle x • is indifferent between them Assumption 2: Transitivity (rationality) • consumer's preference over bundles is consistent: • if consumer prefers • Bundle z to Bundle y and • Bundle y to Bundle x • then consumer prefers Bundle z to Bundle x Economist’s transitivity experiment • Weinstein (1968) • no subject knew the purpose of the experiment • each given choices between 10 goods of equal value, offered in all possible combinations of pairs • $3 in cash • 8-cup Wearever aluminum coffee percolator • free pass to next 4 Saturday matinees at subject's favorite motion picture theater Results • transitive responses • 93.5% adults (≥ 18 years old) • 79.2% children aged 9 to 12 • result may explain why political and economic restrictions are placed on youths Psychologists' transitivity experiment • Bradbury and Ross (1990) • share of people who made intransitive choice involving 3 colors: • nearly 50% of 4 or 5 year olds • 15% of 11-13 year olds • 5% for adults • novelty (a preference for a new color) is responsible for most of the intransitive responses • novelty effect is especially strong in children Assumption 3: More is better • more of a good is better than less of it • good: commodity for which more is preferred to less at least at some levels of consumption • bad: something for which less is preferred to more, such as pollution • consumers are not satiated 3 Which assumptions are critical for our model? • completeness and transitivity assumptions are crucial • more-is-better assumption is included only to simplify the analysis Why do economists make the more-is-better assumption? • it appears to be true about most people • with free disposal, you can't be worse off with extra goods • consumers only buy goods where this condition is met (we'll show later) Preference maps • we summarize information about a Lisa’s preferences using a graph • we can rank some bundles using more-is- better assumption Figure 4.1a Bundles of Pizzas and Burritos Lisa Might Consume B, Burritos per semester (a) Ranking Regions 302515 Z, Pizzas per semester 25 20 15 10 0 d a b e c f A B Indifference curve • we ask Lisa to identify all the bundles that give her the same amount of pleasure as consuming bundle e • her answer: Curve I in Figure 4.1b, “Indifference Curve” Figure 4.1b Bundles of Pizzas and Burritos Lisa Might Consume B, Burritos per semester (b) Indifference Curve 302515 Z, Pizzas per semester 25 20 15 10 0 d a b I e c f 4 Indifference or preference map • complete set of indifference curves that summarize a consumer's tastes • Figure 4.1c shows parallel curves, but they need not be parallel Figure 4.1c Bundles of Pizzas and Burritos Lisa Might Consume B, Burritos per semester (c) Preference Map 302515 Z, Pizzas per semester 25 20 15 10 0 d I 0 I 1 I 2 e c f Indifference curve properties 1. bundles on indifference curves farther from the origin are preferred to those on indifference curves closer to the origin 2. there is an indifference curve through every possible bundle 3. indifference curves cannot cross 4. indifference curves are “thin” 5. indifference curves slope down Property 1: Better off on farther indifference curves • bundles on indifference curves farther from the origin are preferred to those on indifference curves closer to the origin • by more is better assumption Figure 4.1c Bundles of Pizzas and Burritos Lisa Might Consume B, Burritos per semester (c) Preference Map 302515 Z, Pizzas per semester 25 20 15 10 0 d I 0 I 1 I 2 e c f Property 2: Indifference curve through every possible bundle • by completeness: consumer can compare any bundle to another • compared to a given bundle, some bundles are • preferred, • enjoyed equally •inferior • connecting bundles that give the same pleasure produces an indifference curve that includes the given bundle 5 Property 3: Indifference curves cannot cross • assume the opposite: two indifference curves cross at Bundle e in Figure 4.2a. • look for a contradiction Figure 4.2a Impossible Indifference Curves B, Burritos per semester (a) Crossing Z, Pizzas per semester I 1 I 0 a b e Property 4: Indifference curves are "thin" • assume the opposite: suppose an indifference curve were thick (Figure 4.2c). • look for a contradiction Figure 4.2c Impossible Indifference Curves B, Burritos per semester a b (c) Thick Z, Pizzas per semester I Property 5: Indifference curves slope down • assume the opposite: indifference curve I slopes up in Figure 4.2b • look for a contradiction Figure 4.2b Impossible Indifference Curves B, Burritos per semester (b) Upward Sloping Z, Pizzas per semester I a b 6 Willingness to substitute • downward-sloping indifference curve ⇒ consumer is willing to substitute one good for the other • marginal rate of substitution (MRS) of burritos (rise) for pizza (run), is slope of indifference curve: B MRS Z ∆ = ∆ MRS varies along the indifference curve • indifference curve bow away from the origin (convex) • indicates diminish marginal rates of substitution (MRS) Figure 4.3a Marginal Rate of Substitution B, Burritos per semester (a) Indifference Curve Convex to the Origin 5 3 8 1 –1 1 1 2 0 –2 – 3 3456 Z, Pizzas per semester a b c d I Concave indifference curve • if indifference curve bows toward the origin (concave) • then (implausibly) increasing MRS Figure 4.3b Marginal Rate of Substitution B, Burritos per semester (b) Indifference Curve Concave to the Origin 5 7 1 1 2 0 –2 – 3 3456 Z, Pizzas per semester a b c I Perfect substitutes • straight line indifference curves • if slope is –1, MRS = 1 (Coke-Pepsi) 7 Figure 4.4a Perfect Substitutes, Perfect Complements, Imperfect Substitutes Coke, Cans per week (a) Perfect Substitutes 1234 Pepsi, Cans per week 1 0 2 3 4 I 1 I 2 I 3 I 4 Perfect complements • right-angle indifference curves • MRS = 0 (Coffee-Cream) Figure 4.4b Perfect Substitutes, Perfect Complements, Imperfect Substitutes Ice cream, Scoops per week (b) Perfect Complements 123 Pie, Slices per week 1 2 3 0 I 1 I 2 I 3 a d ec b Imperfect substitutes • convex indifference curves • lies between the two extremes (straight and right-angle indifference curves) Figure 4.4c Perfect Substitutes, Perfect Complements, Imperfect Substitutes B, Burritos per semester (c) Imperfect Substitutes Z, Pizzas per semester I Application: Food vs. clothing • indifference curves of the average U.S. consumer between food consumed at home and clothing • as we move away from the origin: • I 1 near right angles (perfect complements) • I 4 near straight lines (perfect substitutes) • why: minimum levels of food and clothing are necessary to support life 8 Indifference Curves Between Food and Clothing Food at home per year Clothing per year I 4 I 3 I 2 I 1 Utility • numerical value that reflects relative rankings of various bundles of goods • if Lisa prefers bundle a to b, then utility from a > utility from b • utility function: • relationship between utility measure and every possible bundle of good • succinct summary of information in indifference map Ordinal preference • ordinal scale maintains only ranking: • letter grades • utility • cardinal scale maintains ranking and allows absolute comparisons: money payments Utility and indifference curves • could plot utility and two goods in a 3D figure: hill of happiness • indifference curves are determined by taking parallel cuts of the hill of happiness at some given level of utility Utility and marginal utility • marginal utility of Z • change in utility from a small increase in Z holding B fixed Z U MU Z ∆ = ∆ U, Utils ∆ U = 20 Utility function, U (10, Z) ∆ Z = 1 10987654321 Z, Pizzas per semester 0 350 250 (a) Utility 230 9 , MarginalMU Z utility of pizza MU Z 10987654321 Z, Pizzas per semester 0 130 (b) Marginal Utility 20 Utility and marginal of substitution Lisa trades from one bundle on an indifference curve to another by giving up some burritos to gain more pizza Z B B MU MRS Z MU ∆ ==− ∆ Budget constraint • Lisa spends all her income, Y, on pizza and burritos • her budget constraint is • p B B = expenditure on B burritos • p z Z = expenditure on Z pizzas B Z pB pZ Y+= Rewrite budget constraint • suppose • p Z = $1 • p B = $2 • Y = $50 • Plot this expression: Figure 4.6 Z B YpZ B p − = Figure 4.6 Budget Constraint B, Burritos per semester Opportunity set 50 = Y/p Z L 1 (p Z = $1, Y = $50) 25 = Y/p B 20 10 10030 Z, Pizzas per semester a b c d Opportunity set • all bundles a consumer can buy • includes bundles on and inside the budget constraint 10 Slope of budget constraint • is called the marginal rate of transformation • in our example: Z B B p MRT Z p ∆ ==− ∆ $1 1 $2 2 Z B p MRT p =− =− =− Purchasing fractional quantities • can buy fraction quantities because axes show a rate per time period • effect of a change in price on consumption One price rises • price of pizza doubles: p Z =$2 (up from $1) • price of burritos and income unchanged • slope of the new budget line: MRT = -$2/$2 = -1 • budget constraint swings in toward origin • opportunity set shrinks Figure 4.7a Changes in the Budget Constraint B, Burritos per semester (a) Price of Pizza Doubles Loss 50 L 1 (p Z = $1) L 2 (p Z = $2) 25 250 Z, Pizzas per semester Change in income • consumer's income, Y, increases from $50 to $100 • ⇒ parallel shift out of budget line so MRT is unchanged • opportunity set grows ⇒ consumer can buy more of all goods • effectively, an increase in income is equivalent to a comparable decrease in all prices Figure 4.7b Changes in the Budget Constraint B, Burritos per semester (b) Income Doubles Gain 100 L 3 (Y = $100) L 1 (Y = $50) 50 25 500 Z, Pizzas per semester [...]... problem show: if the consumer buys and consumes both goods, consumers are not satiated (more is preferred to less) I2 I1 Z, Pizzas per semester Answer • suppose contrary: Lisa prefers fewer burritos to more • show a contradiction: because burritos cost money, she's better off consuming no burritos • though some consumers prefer less to more at some quantities, we do not observe consumers making purchases... of goods in Paris that he is currently buying • does he benefit from moving? • changes: ratio of price of American meals to price of French meals • affects: Alexx's choice of his equilibrium bundle and his well being Solved Problem 4.4 French meals per year Solved problem: Food stamps LF Are poor people necessarily better off receiving food stamps or a comparable amount of cash? LA f a I1 I2 American... Budget line with cash Y + 100 • cash gives a greater choice • whether that greater choice matters depends on the tastes of poor people (how much food they eat) f Y C e I3 I2 d I1 B Budget line with food stamps A 0 Original budget line 100 Y Y + 100 Food per month 13 Summary: 1 Preferences • our analysis is based on 3 assumptions: • completeness • transitivity • more is better • indifference curve map summarizes... set is greater, higher is income and lower are prices • budget constraint shows bundles that a consumer can buy spending all income at given prices • slope of budget line is marginal rate of transformation (MRT): rate at which Good 1 can be exchanged for Good 2 in the market 4 Constrained maximizing behavior consumers maximize their well-being subject to the budget constraint where: • highest possible... solution • maximize utility subject to the budget constraint • optimal bundle, two possibilities: • consumer buys some units of all goods • optimum bundle, e, where highest indifference curve touches the budget line • interior solution: buy some units of all goods • corner solution: buy only one good Figure 4.8a Consumer Maximization Tangency property (a) Interior Solution B, Burritos per semester Budget... indifference curves slope down 6 consumers purchase positive quantities only where their indifference curves are convex to origin 2 Utility 3 Budget constraint • utility is a numerical measure of the relative ranking of bundles of goods • utility is an ordinal measure • marginal utility: extra utility from consuming one more unit of a good holding consumption of all other goods constant • consumer' s opportunity... tangent at the optimal bundle 11 Figure 4.8b Consumer Maximization Optimal bundles only on convex sections of indifference curves (b) Corner Solution B, Burritos per semester • if indifference curves are smooth, then optimal bundles lie either 25 • on convex indifference curves or • where the budget constraint hits an axis e I3 I2 Budget line I1 • thus, if a consumer buys both goods, indifference curve... Burritos per semester Budget line • at interior optimum, indifference curve is tangent to budget line: g MRS = − 25 c 20 B 10 e d A 0 f 10 a 30 I3 I2 I1 50 Z, Pizzas per semester Summary: Utility maximized consumers maximize their well-being subject to the budget constraint where • highest possible indifference curve hits budget constraint • indifference curve is tangent to budget constraint (if both goods . taste Individual decision making • consumers face constraints on their choices • consumers maximize their pleasure from consumption subject to constraints • we want to predict behavior not judge i Consumer s. 1 Chapter 4 Consumer Choice Key issues 1. properties of preferences 2. utility 3. budget constraint 4. consumer& apos;s constrained choice Tastes • individual tastes (preferences). i Consumer s problem • consumer allocates money over goods: buys a bundle or market basket of goods • 2 possible theories of consumer behavior • maximizing behavior • random behavior (next chapter) Assumptions