TAILIEUCHUNG - Lecture Economics (19/e) - Chapter 6-App: Consumer behavior

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. | Consumer Behavior 06A Appendix Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin The Budget Line: What is Attainable Combinations of two products a 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 LO6 6App- 2 4 6 8 10 12 Quantity of A 6 8 10 12 4 2 0 Quantity of B The Budget Line LO6 Units of B (Price = $1) Units of A (Price = $) Total Expenditure 8 6 4 2 0 0 3 6 9 12 $12 12 12 12 12 (Attainable) (Unattainable) Income = $12 PA = $ Income = $12 PB = $1 6App- Indifference Curves: What is Preferred Combinations of two products that 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 LO6 6App- Indifference Curves LO6 2 4 6 8 10 12 Quantity of A 6 8 10 12 4 2 0 Quantity of B j k l m 12 6 4 3 2 4 6 8 j k l m I 6App- The Indifference Map Series of indifference curves where each curve reflects different amounts of utility Each successive curve outward reflects a higher level of utility LO6 6App- The Indifference Map LO6 2 4 6 8 10 12 Quantity of A 6 8 10 12 4 2 0 Quantity of B I1 I2 I3 I4 6App- 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- Equilibrium at Tangency LO6 2 4 6 8 10 12 Quantity of A 6 8 10 12 4 2 0 Quantity of B I1 I2 I3 I4 X W Preferred – but requires more income MRS = PB PA 6App- Derivation of the Demand Curve LO6 Price of B $ .50 2 4 6 8 10 12 Quantity of B X 2 4 6 8 10 12 Quantity of A 6 8 10 12 4 2 0 Quantity of B I2 I3 DB 6App-

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