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After completing this chapter, students will be able to: Relate how behavioral economics and prospect theory shed light on many consumer behaviors; relate how the indifference curve model of consumer behavior derives demand curves from budget lines, indifference curves, and utility maximization.
06A Appendix ConsumerBehavior McGrawưHill/Irwin Copyrightâ2012byTheMcGrawưHillCompanies,Inc.Allrightsreserved TheBudgetLine:WhatisAttainable Combinations of two products a • • • LO6 consumer can purchase with their money income Slope is the ratio of the price of B to the price of A Location varies with income changes Location varies with price of products 6App-2 The Budget Line (Price = $1.50) Total (Price = $1) Expenditure 12 $12 12 12 12 12 10 Quantity of A Units of A Units of B 12 (Unattainable) LO6 Income = $12 PA = $1.50 (Attainable) Income = $12 PB = $1 Quantity of B 10 12 6App-3 Indifference Curves: What is Preferred • Combinations of two products that • • LO6 yield the same amount of total utility The consumer is indifferent as to which combination to purchase Characteristics • Downsloping • Convex to the origin • Reflects the MRS 6App-4 Indifference Curves 12 j LO6 Quantity of A 10 j 12 k l m k l m I Quantity of B 10 12 6App-5 The Indifference Map • Series of indifference curves where • LO6 each curve reflects different amounts of utility Each successive curve outward reflects a higher level of utility 6App-6 The Indifference Map 12 Quantity of A 10 I4 I3 I1 LO6 I2 10 12 Quantity of B 6App-7 Equilibrium at Tangency • The consumer’s equilibrium position • Indifference curve is tangent to the budget line • Utility is maximized • MRS equals the ratio of the price of B to the price of A LO6 6App-8 Equilibrium at Tangency 12 Quantity of A 10 PB MRS = PA W X Preferred – but requires more income I4 LO6 I3 I1 Quantity of B 10 I2 12 6App-9 Derivation of the Demand Curve 12 Quantity of A 10 X I2 Price of B 10 Quantity of B I3 12 $1.50 1.00 50 DB LO6 10 Quantity of B 12 6App-10 ... reflects a higher level of utility 6App-6 The Indifference Map 12 Quantity of A 10 I4 I3 I1 LO6 I2 10 12 Quantity of B 6App-7 Equilibrium at Tangency • The consumer s equilibrium position • Indifference... PB = $1 Quantity of B 10 12 6App-3 Indifference Curves: What is Preferred • Combinations of two products that • • LO6 yield the same amount of total utility The consumer is indifferent as to which... Downsloping • Convex to the origin • Reflects the MRS 6App-4 Indifference Curves 12 j LO6 Quantity of A 10 j 12 k l m k l m I Quantity of B 10 12 6App-5 The Indifference Map • Series of indifference curves