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1、Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 3 Consumer Behavior Questions for Review 1. 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
2、 compare and rank all possible baskets of goods and services. (2) Preferences are transitive: this means that preferences are consistent, in the sense that if bundle A is preferred to bundle B and bundle B is preferred to bundle C, then bundle A is preferred to bundle C. (3) More is preferred to les
3、s: this means that all goods are desirable, and that the consumer always prefers to have more of each 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 al
4、ong 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 generally preferred to baskets tha
5、t 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 i
6、ndifference curves is upward sloping, it means one of the goods is a “bad” so that the consumer prefers less of that good rather than more. The positive slope means that the consumer will accept more of the bad only if he also receives more of the other good in return. As we move up along the indiff
7、erence curve the consumer has more of the good he likes, and also more of the good he does not like. 3. Explain why two indifference curves cannot intersect. The figure below shows two indifference curves intersecting at point A. We know from the definition of an indifference curve that the consumer
8、 has the same level of utility for every bundle of goods that lies on the 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 indifferenc
9、e 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 because C contains more of Good Y and the same amount of Good X as does B, and more is preferred to less. But this
10、violates transitivity, so indifference curves must not intersect. 32 Pindyck/Rubinfeld, Microeconomics, Eighth Edition Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall. 4. 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
11、. 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 ind
12、ifference 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. See the diagrams below part c. c. Draw two budget lines with different slopes and illustrate the satisfaction-maximizing choice. What conclusion
13、 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, he will choose to consume only the good on the vertical axis. If Jons b
14、udget line is flatter than his indifference curves, he will choose to consume only the good on the horizontal axis. Jon will always choose a corner solution where he buys only the less expensive good, unless his budget line has the same slope as his indifference curves. In this case any combination
15、of Sprite and Coke that uses up his entire income will maximize Jons satisfaction. The diagrams below show cases where Jons budget line is steeper than his indifference curves and where it is flatter. Jons indifference curves are linear with slopes of 1, and four indifference curves are shown in eac
16、h diagram as solid lines. Jons budget is $4.00. In the diagram on the left, Coke costs $1.00 and Sprite costs $2.00, so Jon can afford 4 Cokes (if he spends his entire budget on Coke) or 2 Sprites (if he spends his budget on Sprite). His budget line is the dashed line. The highest indifference curve he can reach is the one furthest to the right. He can reach that level of utility by purchasing 4 Cokes and no Sprites. In the diagram on the right, the price of Coke is $2.00 an
