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

consumer can purchase with their money income

the price of A

2 4 6 8 10 12

6 8 10 12

4 2

0

Quantity of B

The Budget Line

Units of B

(Price = $1)

Units of A

(Price = $1.50)

Total Expenditure

8 6 4 2 0

0 3 6 9 12

$12 12 12 12

(Unattainable)

Income = $12

P A = $1.50

Income = $12

P B = $1

yield the same amount of total utility

which combination to purchase

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

each curve reflects different amounts

of utility

reflects a higher level of utility

6 8 10 12

4

2

I 2

I 3

I 4

budget line

B to the price of A

6 8 10 12

4

2

I 2

I 3

I 4 X

W

Preferred – but requires more income

MRS = P P B

A

$1.50 1.00

X

6 8 10 12

4 2

0

Quantity of B

I 2 I 3