【经济课件】Ch03 CONSUMER BEHAVIOR.doc

PART IIPRODUCERS, CONSUMERS, AND COMPETITIVE MARKETSCHAPTER 3CONSUMER BEHAVIORTEACHING NOTESChapter 3 builds the foundation for deriving the demand curve in Chapter 4. In order to understand demand theory, students must have a firm grasp of indifference curves, the marginal rate of substitution, the budget line, and optimal consumer choice. It is possible to discuss consumer choice without going into extensive detail on utility theory. Many students find utility functions to be a more abstract concept than preference relationships. However, if you plan to discuss uncertainty in Chapter 5, you will need to cover marginal utility (section 3.5). Even if you cover utility theory only briefly, make sure students are comfortable with the term utility because it appears frequently in Chapter 4.When introducing indifference curves, stress that physical quantities are represented on the two axes. After discussing supply and demand, students may think that price should be on the vertical axis. To illustrate the indifference curves, pick an initial bundle on the graph and ask which other bundles are likely to be more preferred and less preferred to the initial bundle. This will divide the graph into four quadrants, and it is then easier for students to figure out the set of bundles between which the consumer is indifferent. It is helpful to present a lot of examples with different types of goods and see if the class can figure out how to draw the indifference curves. The examples are also useful for explaining the significance of the assumptions made about preferences. In presenting different examples, you can ask which assumption would be violated. Explaining utility follows naturally from the discussion of indifference curves. Though an abstract concept, it is possible to get students to understand the basic idea without spending too much time on the topic. You might point out that we as consumers have a goal in life, which is to maximize our utility subject to our budget constraint. When we go to the store we pick the basket that we like best and that stays within our budget. From this we derive demand curves. Emphasize that it is the ranking that is important and not the utility number, and point out that if we can graph an indifference curve we can certainly find an equation to represent it. Finally, what is most important is the rate at which consumers are willing to exchange goods (the marginal rate of substitution) and this is based on the relative satisfaction that they derive from each good at any particular time.The marginal rate of substitution, MRS, can be confusing to students. Some confuse the MRS with the ratio of the two quantities. If this is the case, point out that the slope is equal to the ratio of the rise, DY, and the run, DX. This ratio is equal to the ratio of the intercepts of a line just tangent to the indifference curve. As we move along a convex indifference curve, these intercepts and the MRS change. Another problem is the terminology “of X for Y.” This is confusing because we are not substituting “X for Y,” but Y for one unit of X. You may want to present a variety of examples in class to explain this important concept. QUESTIONS FOR REVIEW1. What are the four basic assumptions about individual preferences? Explain the significance or meaning of each.(1) Preferences are complete: this means that the consumer is able to compare and rank all possible baskets; (2) Preferences are transitive: this means that preferences are consistent, in that if bundle A is preferred to bundle B and bundle B is preferred to bundle C, then we should be able to conclude that bundle A is preferred to bundle C; (3) More is preferred to less: this means that all goods are desirable, and that the consumer will always prefer to have more of a good; (4) Diminishing marginal rate of substitution: this means that indifference curves are convex, and that the slope of the indifference curve increases (becomes less negative) as we move down along the curve. As a consumer moves down along her indifference curve she is willing to give up fewer units of the good on the vertical axis in exchange for one more unit of the good on the horizontal axis. This assumption also means that balanced market baskets are preferred to baskets that have a lot of one good and very little of the other good. 2. Can a set of indifference curves be upward sloping? If so, what would this tell you about the two goods?A set of indifference curves can be upward sloping if we violate assumption number three; more is preferred to less. When a set of indifference curves is upward sloping, it means one of the goods is a “bad” in that the consumer prefers less of the good rather than more of the good. The positive slope means that the consumer will accept more of the bad good only if she also receives more of the other good in return. As we move up along the indifference curve the consumer has more of the good she likes, and also more of the good she does not like.3. Explain why two indifference curves cannot intersect.The explanation is most easily achieved with the aid of a graph such as Figure 3.3, which shows two indifference curves intersecting at point A. We know from the definition of an indifference curve that a consumer has the same level of utility along any given curve. In this case, the consumer is indifferent between bundles A and B because they both lie on indifference curve U1. Similarly, the consumer is indifferent between bundles A and C because they both lie on indifference curve U2. By the transitivity of preferences this consumer should also be indifferent between C and B. However, we see from the graph that C lies above B, so C must be preferred to B. Thus, the fact that indifference curves cannot intersect is proven.Figure 3.34. Jon is always willing to trade one can of coke for one can of sprite, or one can of sprite for one can of coke. a. What can you say about Jons marginal rate of substitution?Jons marginal rate of substitution can be defined as the number of cans of coke he would be willing to give up in exchange for a can of sprite. Since he is always willing to trade one for one, his MRS is equal to 1.b. Draw a set of indifference curves for Jon.Since Jon is always willing to trade one can of coke for one can of sprite, his indifference curves are linear with a slope of 1.c. Draw two budget lines with different slopes and illustrate the satisfaction-maximizing choice. What conclusion can you draw?Jons indifference curves are linear with a slope of 1. Jons budget line is also linear, and will have a slope that reflects the ratio of the two prices. If Jons budget line is steeper than his indifference curves then he will choose to consume only the good on the vertical axis. If Jons budget line is flatter than his indifference curves then he will choose to consumer only the good on the horizontal axis. Jon will always choose a corner solution, unless his budget line has the same slope as his indifference curves. In this case any combination of Sprite and Coke that uses up his entire income with maximize his satisfaction.5. What happens to the marginal rate of substitution as you move along a convex indifference curve? A linear indifference curve? The MRS measures how much of a good you are willing to give up in exchange for one more unit of the other good, keeping utility constant. The MRS diminishes along a convex indifference curve in that as you move down along the indifference curve, you are willing to give up less and less of the one good in exchange for the other. The MRS is also the slope of the indifference curve, which increases (becomes less negative) as you move down along the indifference curve. The MRS is constant along a linear indifference curve, since in this case the slope does not change. The consumer is always willing to trade the same number of units of one good in exchange for the other.6. Explain why an MRS between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction.The MRS describes the rate at which the consumer is willing to trade one good for another to maintain the same level of satisfaction. The ratio of prices describes the trade-off that the market is willing to make between the same two goods. The tangency of the indifference curve with the budget line represents the point at which the trade-offs are equal and consumer satisfaction is maximized. If the MRS between two goods is not equal to the ratio of prices, then the consumer could trade one good for another at market prices to obtain higher levels of satisfaction. For example, if the slope of the budget line (the ratio of the prices) is 4 then the consumer can trade 4 units of good 2 for one unit of good 1. If the MRS at the current bundle is 6, then the consumer is willing to trade 6 units of good 2 for one unit of good 1. Since the two slopes are not equal the consumer is not maximizing her satisfaction. The consumer is willing to trade 6 but only has to trade 4, so she should make the trade. This trading continues until the highest level of satisfaction is achieved. As trades are made, the MRS will change and become equal to the price ratio.7. Describe the indifference curves associated with two goods that are perfect substitutes. What if they are perfect complements?Two goods are perfect substitutes if the MRS of one for another is a constant number. Given the MRS is a constant number, the slope of the indifference curves will be constant, and the indifference curves are therefore linear. If two goods are perfect complements, the indifference curves are L-shaped. In this case the consumer wants to consume the two goods in a fixed proportion, say one unit of good 1 for every 1 unit of good 2. If she has more of one good but not more of the other then she does not get any extra satisfaction. 8. What is the difference between ordinal utility and cardinal utility? Explain why the assumption of cardinal utility is not needed in order to rank consumer choices.Ordinal utility implies an ordering among alternatives without regard for intensity of preference. For example, if the consumers first choice is preferred to their second choice, then utility from the first choice will be higher than utility from the second choice. How much higher is not important. An ordinal utility function generates a ranking of bundles and no meaning is given to the utility number itself. Cardinal utility implies that the intensity of preferences may be quantified, and that the utility number itself has meaning. An ordinal ranking is all that is needed to rank consumer choices. It is not necessary to know how intensely a consumer prefers basket A over basket B; it is enough to know that A is preferred to B.9. Upon merging with the West German economy, East German consumers indicated a preference for Mercedes-Benz automobiles over Volkswagens. However, when they converted their savings into deutsche marks, they flocked to Volkswagen dealerships. How can you explain this apparent paradox?Three assumptions are required to address this question: 1) that a Mercedes costs more than a Volkswagen; 2) that the East German consumers utility function comprises two goods, automobiles and all other goods evaluated in deutsche marks; and 3) that East Germans have incomes. Based on these assumptions, we can surmise that while East German consumers may prefer a Mercedes to a Volkswagen, they either cannot afford a Mercedes or they prefer a bundle of other goods plus a Volkswagen to a Mercedes alone. While the marginal utility of consuming a Mercedes exceeds the marginal utility of consuming a Volkswagen, the consumer will consider marginal utility per dollar for each good. This means the marginal utility per dollar must have been higher for the Volkswagen since consumers flocked to the Volkswagen dealerships and not the Mercedes dealerships.10. Draw a budget line and then draw an indifference curve to illustrate the satisfaction maximizing choice associated with two products. Use your graph to answer the following questions.a. Suppose that one of the products is rationed. Explain why the consumer is likely to be worse off.When goods are not rationed, the consumer is able to choose the satisfaction-maximizing bundle where the slope of the budget line is equal to the slope of the indifference curve, or the price ratio is equal to the MRS. This is point A in the graph below. If good 1 is now rationed the consumer will not be able to attain the utility maximizing point. He or she will have to consume more of the other good instead. This is point B below.b. Suppose now that the price of one of the products is fixed at a level below the current price. As a result, the consumer is not able to purchase as much as she would like of the product. Can you tell if the consumer is better off or worse off?When the price of the good is fixed at a level below the current (equilibrium) price, there will be a shortage of the good and the good will have to be effectively rationed. As in the question above, the consumer is worse off because she is not able to attain her utility maximizing point.11. Based on his preferences, Bill is willing to trade 4 movie tickets for 1 ticket to a basketball game. If movie tickets cost $8 each and a ticket to the basketball game costs $40, should Bill make the trade? Why or why not?No Bill should not make the trade. If he gives up the 4 movie tickets then he will save $8 per ticket for a total of $32. However, this is not enough for a basketball ticket. He would in fact have to give up 5 movie tickets if he wanted to buy another basketball ticket. Notice also, that the marginal utility per dollar is higher for movie tickets so Bill will be better off if he consumes more movie tickets and fewer basketball tickets. To figure this out recall that what Bill is willing to do defines his MRS. His MRS is 4 so this means that the marginal utility of a basketball game is 4 and the marginal utility of a movie is 1:.Now the marginal utility per dollar can be computed:12. Describe the equal marginal principle. Explain why this principle may not hold if increasing marginal utility is associated with the consumption of one or both goods.The equal marginal principle states that the ratio of the marginal utility to price must be equal across all goods to obtain maximum satisfaction. In other words, utility maximization is achieved when the budget is allocated so that the marginal utility per dollar of expenditure is the same for each good. If the marginal utility per dollar is not equal then utility can be increased by allocating more dollars to the good with the higher marginal utility pe