经济学（微观）（英文版原书第7版）课件 第10-18章　消费者选择和行为经济学-公共选择、税收和收入

EconomicsSeventhEditionChapter10ConsumerChoiceandBehavioralEconomicsCopyright©2019,2017,2015PearsonEducation,Inc.AllRightsReserved.ChapterOutline10.1

UtilityandConsumerDecisionMaking10.2

WhereDemandCurvesComeFrom10.3

SocialInfluencesonDecisionMaking10.4

BehavioralEconomics:DoPeopleMakeRationalChoices?Appendix

UsingIndifferenceCurvesandBudgetLinestoUnderstandConsumerBehavior10.1UtilityandConsumerDecisionMakingDefineutilityandexplainhowconsumerschoosegoodsandservicestomaximizetheirutility.Inourstudyofconsumerssofar,wehavelookedatwhattheydo,butnotwhytheydowhattheydo.Economicsisallaboutthechoicesthatpeoplemake;abetterunderstandingofthosechoicesfurthersourunderstandingofeconomicbehavior.Atthesametime,weneedtoknowthelimitsofourunderstanding.Thischapterwillexaminewhatweknowandwhatwecan’texplainabouthowconsumersbehave.RationalityandItsImplicationsAsastartingpoint,economistsassumethatconsumersarerational:makingchoicesintendedtomakethemselvesaswell-offaspossible.Weexaminethesechoiceswhenconsumersmaketheirdecisionsabouthowmuchofvariousitemstobuy,giventheirscarceresources(income).Withtheirlimitedresources,howdopeoplechoosewhattoconsume?Utility:MeasuringHappinessEconomistsrefertotheenjoymentorsatisfactionthatpeopleobtainfromconsuminggoodsandservicesasutility.Utilitycannotbedirectlymeasured,butfornow,supposethatitcould.Whatwouldwesee?Aspeopleconsumedmoreofanitem(say,pizza)theirtotalutilitywouldchange.Theamountbywhichtotalutilitywouldchangewhenconsuminganextraunitofagoodorserviceiscalledthemarginalutility(MU).Remember:ineconomics,“marginal”means“additional”.DiminishingMarginalUtilityWegenerallyexpecttoseethefirstitemsconsumedproducethemostmarginalutility,sothatsubsequentitemsgivediminishingmarginalutility.Lawofdiminishingmarginalutility:Theprinciplethatconsumersexperiencediminishingadditionalsatisfactionastheyconsumemoreofagoodorserviceduringagivenperiodoftime.Figure10.1TotalandMarginalUtilityfromEatingPizzaonSuperBowlSunday(1of2)ThetableshowsthetotalutilityyoumightderivefromeatingpizzaonSuperBowlSunday.Thenumbers,inutils,representhappiness:higherisbetter.Agraphofthisutilityisinitiallyrisingquickly,thenmoreslowly;andeventually,itturnsdownward(asyougetsickofpizza).Figure10.1TotalandMarginalUtilityfromEatingPizzaonSuperBowlSunday(2of2)Theincreaseinutilityfromoneslicetothenextisthemarginalutilityofasliceofpizza.Wecancalculatemarginalutilityforeverysliceofpizza……thengraphtheresults.Thegraphofmarginalutilityisdecreasing,showingthelawofdiminishingmarginalutilitydirectly.AllocatingYourResourcesGivenunlimitedresources,aconsumerwouldconsumeeverygoodandserviceupuntilthemaximumtotalutility.Butresourcesarescarce;consumershaveabudgetconstraint.Budgetconstraint:Thelimitedamountofincomeavailabletoconsumerstospendongoodsandservices.Theconceptofutilitycanhelpusfigureouthowmuchofeachitemtopurchase.Eachitempurchasedgivessome(possiblynegative)marginalutility.Bydividingbythepriceoftheitem,weobtainthemarginalutilityperdollarspent;thatis,therateatwhichthatitemallowstheconsumertotransformmoneyintoutility.Table10.1TotalUtilityandMarginalUtilityfromEatingPizzaandDrinkingCokeNumberofSlicesofPizzaTotalUtilityfromEatingPizzaMarginalUtilityfromtheLastSliceNumberofCupsofCokeTotalUtilityfromDrinkingCokeMarginalUtilityfromtheLastCup00—00—1202012020236162351534610345104526450555425533651−3652−1SupposeyoucannowobtainutilitybyeatingpizzaanddrinkingCoke.Thetablegivesthetotalandmarginalutilityderivedfromeachactivity.Table10.2ConvertingMarginalUtilitytoMarginalUtilityperDollar(1)SlicesofPizza(2)MarginalUtility(MUPizza)(3)MarginalUtilityperDollar(4)CupsofCoke(5)MarginalUtility(MUCoke)(6)MarginalUtilityperDollar12010120202168215153105310104634555215336−3−1.56−1−1Supposethatpizzacosts$2persliceandCoke$1percup.Marginalutilityofpizzaperdollarisjustmarginalutilityofpizzadividedbytheprice,$2.SimilarlyforCoke:divideby$1.Table10.3EqualizingMarginalUtilityperDollarSpent(1of2)CombinationsofPizzaandCokewithEqualMarginalUtilitiesperDollarMarginalUtilityperDollar(MU/P)TotalSpendingTotalUtility1sliceofpizzaand3cupsofCoke10$2+$3=$520+45=653slicesofpizzaand4cupsofCoke5$6+$4=$1046+50=964slicesofpizzaand5cupsofCoke3$8+$5=$1352+53=105SupposethemarginalutilityperdollarobtainedfrompizzawasgreaterthanthatobtainedfromCoke.ThenyoushouldeatmorepizzaanddrinklessCoke.Thisimpliestheruleofequalmarginalutilityperdollarspent:consumersshouldseektoequalizethe“bangforthebuck”.Somecombinationssatisfyingthisrulearegivenabove.Table10.3EqualizingMarginalUtilityperDollarSpent(2of2)CombinationsofPizzaandCokewithEqualMarginalUtilitiesperDollarMarginalUtilityperDollar(MU/P)TotalSpendingTotalUtility1sliceofpizzaand3cupsofCoke10$2+$3=$520+45=653slicesofpizzaand4cupsofCoke5$6+$4=$1046+50=964slicesofpizzaand5cupsofCoke3$8+$5=$1352+53=105Theactualcombinationtopurchasewoulddependonyourbudgetconstraint:With$5tospend,youwouldpurchase1sliceofpizzaand3cupsofCoke.With$10tospend,youwouldpurchase3slicesofpizzaand4cupsofCoke.Ineachcase,youseektoexhaustyourbudget,sincespendingadditionalmoneygivesmoreutility.ConditionsforMaximizingUtilityThisgivesustwoconditionsformaximizingutility:Satisfytheruleofequalmarginalutilityperdollarspent:Exhaustyourbudget:Spendingonpizza+SpendingonCoke=BudgetWhatifWe“Disobey”theRule?Itshouldbeclearthatfailingtospendallyourmoneywillresultinlessutility—eachitemyoubuyincreasesyourutility.Butwhatifyoubuyacombinationwhichdoesn’tsatisfytheruleofequalmarginalutilityperdollarspent?Forexample,youcouldbuy4slicesofpizzaand2cupsofCokefor$10.FromTable10.1,thiswouldgiveyou52+35=87utils,lessthanthe96utilsthatyougetfrom3slicesand4cups.Marginalutilityperdollarfromfourthslice:3utilsperdollarMarginalutilityperdollarfromsecondcup:15utilsperdollarSinceyougetsomuchmoremarginalutilityperdollarfromCoke,yououghttodrinkmoreCokeandeatlesspizza—andindeed,thatwouldincreaseutility.WhatifPricesChange?Ifthepriceofpizzachangesfrom$2to$1.50,thentheruleofequalmarginalutilityperdollarspentwillnolongerbesatisfied.Youmustadjustyourpurchasingdecision.Wecanthinkofthisadjustmentintwoways:Youcanaffordmorethanbefore;thisislikehavingahigherincome.PizzahasbecomecheaperrelativetoCoke.Werefertotheeffectfrom1.astheincomeeffect,andtheeffectfrom2.asthesubstitutioneffect.1.IncomeEffectIncomeeffect:Thechangeinthequantitydemandedofagoodthatresultsfromtheeffectofachangeinpriceonconsumerpurchasingpower,holdingallotherfactorsconstant.Weknowthatsomegoodsarenormal(goodsthatweconsumemoreofasourincomerises)andsomeareinferior(goodsthatweconsumelessofasourincomerises).Ifpizzaisanormalgood,theincomeeffectofitspricedecreasingwillcauseyoutoconsumemorepizza.Ifpizzaisaninferiorgood,theincomeeffectofitspricedecreasingwillcauseyoutoconsumelesspizza.Ispizzaanormalorinferiorgoodforyou?2.SubstitutionEffectSubstitutioneffect:Thechangeinthequantitydemandedofagoodthatresultsfromachangeinpricemakingthegoodmoreorlessexpensiverelativetoothergoods,holdingconstanttheeffectofthepricechangeonconsumerpurchasingpower.Ifthepriceofpizzafalls,pizzabecomescheaperrelativetoCoke.Theopportunitycostofconsumingasliceofpizzafalls.Thissuggestseatingmorepizza.Table10.4IncomeEffectandSubstitutionEffectofaPriceChangeWhenprice…Consumerpurchasingpower…Theincomeeffectcausesquantitydemandedto…Thesubstitutioneffectcausestheopportunitycostofconsumingagoodto…decreases,increases.increaseforanormalgoodanddecrease

foraninferiorgood.decreasewhenthepricedecreases,whichcausesthequantityofthegooddemandedtoincrease.increases,decreases.decreaseforanormalgoodandincreaseforaninferiorgood.increasewhenthepriceincreases,whichcausesthequantityofthegooddemandedtodecrease.Thetablesummarizestheincomeandsubstitutioneffects.Table10.5AdjustingOptimalConsumptiontoaLowerPriceofPizzaSupposethepriceofpizzafallsto$1.50perslice:Apossiblenewcombinationofitemsis4slicesofpizzaand4cupsofCoke,costing4×$1.50+4×$1.00=$10.00.Themarginalutilityperdollarisnotquiteequal,butitisascloseaswecangetwithoutallowingfractionalgoods.NumberofSlicesofPizzaMarginalUtilityfromLastSlice

MarginalUtilityperDollarNumberofCupsofCokeMarginalUtilityfromLastCup

MarginalUtilityperDollar

12013.331202021610.67215153106.6731010464455521.335336−3−26−1−110.2WhereDemandCurvesComeFromUsetheconceptofutilitytoexplainthelawofdemand.Recallthelawofdemand:wheneverthepriceofaproductfalls,thequantitydemandedincreases.Wearenowinapositiontoseewhythishappensforanindividual,byconsideringtheincomeandsubstitutioneffects:Thesubstitutioneffecttellsusthattheproducthasbecomerelativelycheaper,soweconsumemoreofit.Theincomeeffecttellsusourincomeiseffectivelyhigher,so(atleastforanormalgood)weconsumemoreofit.Figure10.2DerivingtheDemandCurveforPizzaWecanuseourtwopreviousobservationsofconsumerbehavior(withpizzapricesof$2.00and$1.50)totraceoutyourdemandcurveforpizza.Figure10.3DerivingtheMarketDemandCurvefromIndividualDemandCurvesEachindividualhasademandcurveforpizza.Byaddingtheindividualdemandateachprice,weobtainthemarketdemandforpizza.ApplytheConcept:CouldaDemandCurveSlopeUpward?Forademandcurvetobeupwardsloping,thegoodwouldhavetobeaninferiorgoodmakingupaverylargeportionofconsumers’budgetswithagreaterincomeeffectthansubstitutioneffect.A2006economicexperimentrevealedthatforpoorregionsinChina,decreasesinthepriceofriceledtosomeverypoorpeopleconsuminglessrice.Agoodwithanupward-slopingdemandcurveisknownasaGiffengood.10.3SocialInfluencesonDecisionMakingExplainhowsocialinfluencescanaffectconsumptionchoices.Inmoststandardeconomicmodels,weassumepeoplemakechoicesindependentlyofothers.Suchmodelssometimesincorrectlypredictconsumerbehavior,byignoringthesocialaspectsofdecision-making.“Theutilityfromdrugs,crime,goingbowling…dependsonwhetherfriendsandneighborstakedrugs,commitcrimes,gobowling…” GaryBeckerandKevinMurphyinSocialEconomics:MarketBehaviorinaSocialEnvironmentExamplesofSocialInfluencesonDemand(1of2)Celebrityendorsements:

Firmsusecelebrityendorsementsregularly.Theywork.Consumersmightbelieve:“ThecelebrityknowsmoreabouttheproductthanIdo”;or“Bybuyingthisproduct,Iwillbecomemorelikethecelebrity.”Networkexternalities:Situationsinwhichtheusefulnessofaproductincreaseswiththenumberofconsumerswhouseit.Examples:Facebook;Blu-raydiscs;datingapps.Networkexternalitiesmightresultinmarketfailure,ifenoughpeoplebecomelockedintoinferiorproducts.Example:QWERTYkeyboardsarelessefficientforthumbtypingonphonesthansomealternatives,butswitchingishard.ExamplesofSocialInfluencesonDemand(2of2)Fairness:Peopleliketobetreatedfairlyandprefertotreateachotherfairlyevenifitisbadforthemfinancially.Example:Peopletendtotiptheirservers,eveniftheyneverplantogobacktotherestaurant.Smartbusinesseslearnfromthisandattempttoappearfairevenwhenitwillcostthemprofits.Example:TheNFLsellsticketstotheSuperBowlat$800-$2000(2015prices),buttheseticketsgetresoldformuchmore.SurveysrevealthatNFLfanswouldconsideritunfairiftheNFLraisedticketprices.Instead,fansbelievethecurrentsystemofrandomlydistributingticketstoapplicantsisfairer.TheNFLforgoespotentialprofittoavoidalienatingfans.ApplytheConcept:WhoMadetheMostProfitfromtheBroadwayMusicalHamilton?(1of2)Theaveragefacevalueofticketsforthelast100performancesofHamiltonwas$189.Buttheseticketsresoldfor$1,120onaverage.Ticketresellersmade$10.5millionfromHamilton,nearlyfourtimesthe$2.7milliontheshow’sproducersearned.ApplytheConcept:WhoMadetheMostProfitfromtheBroadwayMusicalHamilton?(2of2)Whydidn’ttheproducersraiseprices,tothelevelwherequantitydemandedequaledquantitysupplied?Theywerereluctanttoraisepricesandbeperceivedpoorly,hurtingtheirreputation.Whatwouldyouhavedone?ExperimentalEconomicsOverthelasttwodecadessomeeconomistshaveemulatedpsychologistsbyperforminglaboratoryexperimentsonhumansubjects.Thisfieldisknownasexperimentaleconomics.Peoplearerecruitedtoparticipateintheseexperimentsandrewardedwithmoneyfortheirperformance,ineffortstomimicreal-worlddecision-makingscenarios.Figure10.4TheUltimatumGame(1of3)Acommonlaboratorygameisshownontheright,calledtheultimatumgame.Anallocatordecideshowtosplit$20betweenherandarecipient.Therecipientaccepts(inwhichcaseeachreceivetheallocatedsplit)…orrejects(inwhichcaseeachreceivesnothing).Figure10.4TheUltimatumGame(2of3)Howwouldyouplaythisgame?Ifnoonecaresaboutfairness,offertherecipient$0.01,whichhewouldaccept.Butinreallifeplay,allocatorsusuallyoffer40+percenttotherecipient,andrecipientsoffered<10percentusuallyreject.Whatdoesthissayabouthowpeopleact?Figure10.4TheUltimatumGame(3of3)Analternativeversionofthisgameisthedictatorgame;now,therecipientcannotreject.When161Cornellstudentsplayedthisgame,andwereonlyallowed$10/$10or$18/$2splits……122chosethe$10/$10split!AreLaboratoryExperimentsReliable?Thedollaramountschosenmaynotbelargeenoughtogenerate“real-world”behavior.Astheamountinquestiongoesup,peopletendtobelessgenerousintheiroffersandrejectunfairoffersless.Peoplearelesslikelytogiveawaymoneytheyfeelentitledto.Ifsubjectsworkforashorttimeperiodto“earn”theirmoneyinthedictatorgame,theyaremuchlesslikelytogiveortakeanything.Theimplicationsofexperimentalresultsaresometimesnotasclear-cutastheyseem.10.4BehavioralEconomics:DoPeopleMakeRationalChoices?Describethebehavioraleconomicsapproachtounderstandingdecisionmaking.Inrecentyears,someeconomistshavestartedstudyingsituationsinwhichpeoplemakechoicesthatdonotappeartobeeconomicallyrational.Thisfieldofstudyisknownasbehavioraleconomics.Threecommonmistakesmadebyconsumersare:TakingintoaccountmonetarycostsbutignoringnonmonetaryopportunitycostsFailingtoignoresunkcostsBeingunrealisticabouttheirownfuturebehavior1.IgnoringNonmonetaryCostsPeopleoftentreatmonetaryandnonmonetarycostsdifferently,eventhoughtheyarebothopportunitycosts.Opportunitycost:Thehighest-valuedalternativethatmustbegivenuptoengageinanactivity.Example:PeoplewhowontheNFLlotteryforSuperBowlticketswereaskedthefollowingtwoquestions:Ifyouhadnotwonthelottery,wouldyouhavebeenwillingtopay$3000fortheticket?If,afterwinningthelottery,someonehadofferedyou$3000foryourticket,wouldyouhavesoldit?Traditionaleconomistsbelievethatifyouanswer“no”tothefirstquestion,youshouldanswer“yes”tothesecond.Bothquestionsrelyonwhetheryouvaluetheticketat$3,000ormore.SuperBowlTicketQuestionResultsPeopledidnotanswerthosequestionssimilarly;farfromit:94percentsaidtheywouldnothaveboughttheticketfor$3,000,but92percentsaidtheywouldnotselltheticketfor$3,000either!Behavioraleconomistsrefertothisdifferencetotheendowmenteffect:thetendencyofpeopletobeunwillingtosellagoodtheyalreadyowneveniftheyareofferedapricethatisgreaterthanthepricetheywouldbewillingtopaytobuythegoodiftheydidn’talreadyownit.Peopledon’tlikelosingwhattheyhave;theyconsiderlosinganobjecttohurtthemmorethangainingasimilarobjectwouldhelpthem.2.FailingtoIgnoreSunkCostsAsunkcostisacostthathasalreadybeenpaidandcannotberecovered.Onceyouhavepaidmoneyandcan’tgetitback,youshouldignorethatmoneyinanyfuturedecisionsyoumake.Butpeopleoftenallowpastcoststoinfluencefuturedecisions.Example:NFLteamspersistwithfirstroundpickquarterbacksmuchlongerthanlaterroundpickswithsimilarperformance,becausetheyhave“paid”moreforthefirst-rounder.Admittingmistakesandmovingoniscrucial,butpeopleoftenfindthatdifficulttodo.ApplytheConcept:ABloggerWhoUnderstandsSunkCosts(1of2)In2000,ArnoldKimbeganbloggingaboutAppleproducts.By2008,Kim’ssitehadbecomeverysuccessful,andhewasearningmorethan$100,000peryearfrompaidadvertising.Soundsgood,right?The“problem”wasthatKimwasamedicaldoctorwhohadinvestedover$200,000inhiseducation.ApplytheConcept:ABloggerWhoUnderstandsSunkCosts(2of2)WhatshouldKimdo?Hebelievedhewouldultimatelymakemoreasabloggerthanasadoctor,butcommittingtobloggingfull-timewouldmean“wasting”hiseducation.Kimrealizedhiseducationcostsweresunk—unrecoverableregardlessofwhatcareerchoicehemade.Sohewentwithwhathewantedtodo:bloggingfulltime.Couldyouhavemadethesamechoice?3.BeingUnrealisticaboutFutureBehaviorPeopleoftenmakedecisionsthatareinconsistentwiththeirlong-runintentions.Example:In2010,69percentofsmokersreportedwantingtoquit,and52percentactuallyattemptedtoquit.Butdespitetheirintentions,fewactuallyquit;theyfoundithardtocontroltheirfuturebehavior.Economiststrytounderstandthisbyarguingthatmanypeoplehavepreferencesthatarenotconsistentovertime.Short-runpreferencesareoftennotconsistentwithlong-runpreferences.“Nudges”:UsingBehavioralEconomicstoGuideBehaviorSmallincentivesusingbehavioraleconomicsideascanresultinimportantchangesinbehavior:Changingfromrequiringasmallamountofpaperworktoenrollinaretirementplan,torequiringasmallamountofpaperworktooptout,resultedinincreasesinretirementplanparticipation.TheWellthappalignslong-andshort-runpreferencesfortakingmedication,bygivingpatients$150,andremovingasmallamounteverydaytheyfailtotaketheirmedication.Bothofthese“nudges”makegooduseoftheendowmenteffect.IsOurTheoryofRationalEconomicActorsUseless?Ourtheoryofutilitymaximizationsuggestsweshouldcomparethemarginalutilityperdollarspentoneveryitemwebuy.Butwhenyougogroceryshopping,buyingdozensofitems,wouldyoureallydothis?Likely,no.Doesthisinvalidateourtheory?Traditionaleconomistsoftenanswer“no”,because:Unrealisticassumptionsarenecessarytosimplifycomplexdecisionmakingproblems,inordertofocusonthemostimportantfactors.Modelsarebestjudgedbythesuccessoftheirpredictions,ratherthantheaccuracyoftheirassumptions.Indeed,modelslikeourstandardonearequitesuccessfulinpredictingmanytypesofconsumerbehavior.TheBehavioralEconomicsofShoppingBehavioraleconomistssaythatitdoesmatterthatconsumersdonotusuallymake“optimal”consumptionchoices.Theybelievemodelinghowpeopleactuallymakedecisionsisimportant.Someimportant“irrational”consumptionbehaviorsinclude:RulesofThumb:Makinggeneralrulesthatoften,butnotalways,produceoptimalresults.Thiscansaveondecision-makingtimeAnchoring:“Irrelevant”informationcanofteninfluencebehavior.Example:posting“limit10itemspercustomer”willofteninducepeopletobuy10items,eventheywouldhaveboughtfewerwithoutthesignApplytheConcept:J.C.PenneyMeetsBehavioralEconomicsWhenRonJohnsonbecameCEOofJ.C.Penney,heinstitutedanewpricingstrategyof“everydaylowprices”,insteadofartificiallyhigh“regular”pricesandnormal“sale”prices.Johnsonthoughtcustomerssawthroughtheartificialprices,butthenewstrategyresultedinpeoplebuyingless,andJohnsonbeingfired.Thisisanexampleof“anchoring”;the“regular”priceactsasananchor,makingpeoplebelievetheyaregettingagooddeal.Appendix:UsingIndifferenceCurvesandBudgetLinestoUnderstandConsumerBehaviorUseindifferencecurvesandbudgetlinestounderstandconsumerbehavior.ConsumptionBundleAConsumptionBundleB2slicesofpizzaand1canofCoke1sliceofpizzaand2cansofCokeSupposeDaveisfacedwiththechoiceoftheabovetwoweekly“consumptionbundles.”Itseemsreasonabletoassumethateither:DaveprefersbundleAtobundleBDaveprefersbundleBtobundleADaveisindifferentbetweenbundlesAandB;thatis,DavewouldbeequallyhappywitheitherAorB.Inthefirstsituation,wewouldsayDavegetshigherutilityfromAthanfromB;inthethird,thattheutilityfromAandBwasthesame.Figure10A.1PlottingDave’sPreferencesforPizzaandCoke(1of4)SupposeDaveisindeedindifferentbetweenBandF,andsupposewecouldfindallofthebundlesthatDavelikedexactlyasmuch.PerhapsbundleE:2slicesofpizzaand8cansofCokewouldmakeDavejustashappy.ThecurvemarkedI3isanindifferencecurve

forDave:acurveshowingthecombinationsofconsumptionbundlesthatgivetheconsumerthesameutility.Figure10A.1PlottingDave’sPreferencesforPizzaandCoke(2of4)Lowerindifferencecurvesrepresentlowerlevelsofutility;higherindifferencecurvesrepresenthigherlevelsofutility.BundleAisonI1,alowerindifferencecurve,anditisclearlyworsethanE,B,orF,sinceithaslesspizzaandCokethananyofthosebundles.BundleCisonahigherindifferencecurveandisclearlybetterthanB(morepizzaandCoke).Figure10A.1PlottingDave’sPreferencesforPizzaandCoke(3of4)ComparingBandDisalittletrickier.AreasonablepersoncouldpreferDtoB,sayifheonlycaredabouthowmuchCokehereceived.ButtheindifferencecurvesrevealthatDaveprefersBtoD,sinceDisonalowerindifferencecurvetoB.Figure10A.1PlottingDave’sPreferencesforPizzaandCoke(4of4)Marginalrateofsubstitution(MRS)istherateatwhichtheconsumeriswillingtotradeoffoneproductforanother,whilekeepingtheconsumer’sutilityconstant.Graphically,thisistheslopeoftheindifferencecurve.FromEtoB,Daveiswillingtotrade4cansofCokefor1sliceofpizza;hisMRSis4betweenEandB.MRStendstodecreaseaswemovetotheright,givingindifferencecurvesaconvexshape.Figure10A.2IndifferenceCurvesCannotCross(1of2)BundlesXandZareonthesameindifferencecurve,soDaveisindifferentbetweenthem.SimilarlyforbundlesXandY.Wegenerallyassumethatpreferencesaretransitive,sothatifaconsumerisindifferentbetweenXandZ,andXandY,thenhemustalsobeindifferentbetweenYandZ.Figure10A.2IndifferenceCurvesCannotCross(2of2)ButDavewillpreferYtoZ,sinceYhasmorepizzaandCoke.Sincetransitivityissuchanintuitivelysensibleassumption,weconcludethatindifferencecurveswillnevercross.Figure10A.3Dave’sBudgetConstraintAconsumer’sbudgetconstraintistheamountofincomeheorshehasavailabletospendongoodsandservices.ThetableshowsbundlesDavecanbuywith$10,ifpizzacosts$2persliceandCokecosts$1percan.Theslopeofthebudgetconstraintisthe(negativeofthe)ratioofprices;itrepresentstherateatwhichDaveisallowedtotradeCokeforpizza:2cansofCokeper1sliceofpizza.Figure10A.4FindingOptimalConsumption(1of2)Davewouldliketoreachthehighestindifferencecurvethathecan.HecannotreachI4;nobundleonI4iswithinhisbudgetconstraint.ThehighestindifferencecurvehecanreachisI3;bundleBisDave’sbestchoice,givenhisbudgetconstraint.Figure10A.4FindingOptimalConsumption(2of2)Tomaximizeutility,aconsumerneedstobeonthehighestindifferencecurve,givenhisbudgetconstraint.Noticethatatthispoint,theindifferencecurveisjusttangenttothebudgetline.ApplytheConcept:AppleDeterminestheOptimalMixofiPhoneFeaturesThebudgetlineinthediagramshowscombinationsofscreensizeandmemorythatcouldbeofferedina$500phone.Differentconsumershavedifferentpreferences,leadingtodifferentoptimalmixesofiPhonefeatures.Figure10A.5HowaPriceDecreaseAffectstheBudgetConstraintWhenthepriceofpizzafalls,Davecanbuymorepizzathanbefore.Ifpizzafallsto$1.00perslice,Davecanbuy10slicesofpizzaperweek;hecanstillafford10cansofCokeperweek.Thebudgetconstraintrotatesoutalongthepizza-axistoreflectthisincreaseinpurchasingpower.Figure10A.6HowaPriceChangeAffectsOptimalConsumptionAsthepriceofpizzafallsandthebudgetconstraintrotatesout,Dave’soptimalbundlewillchange.Whenpizzacost$2.00perslice,Davebought3slices.Nowthatpizzacosts$1.00perslice,Davebuys7slices.ThesearetwopointsonDave’sdemandcurveforpizza(assuminghehas$10,andCokecosts$1percan).Figure10A.7IncomeandSubstitutionEffectsofaPriceChange(1of2)Whenthepriceofpizzafalls,Dave