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## Behavior of Consumers

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**Behavior of Consumers**• Making a choice • “What do you like to order?” • Required information: • price, income, preferences • Preference (spicy, sweet, vegetarian…) • Indifference curves • Budget (income, real purchasing power) • Budget lines**What do you like to have if you can afford anyway?**Pizzas vs Beers “Basket”: (#pizza, #beer) (x,y) HL stands for the happiness level. Characterize the Preference beer x x x x x x x x (High HL) x x (Low HL) pizza**Indifference curve:**A collection of baskets, all of which the consumer considers equally desirable. An indifference curve usually slopes downward. More is better --- the higher indifference curves, the better. Indifference curve beer HL4 HL3 HL2 HL1 pizza**In general, the indifference curves fill the entire x-y**plane. Any two indifference curves never cross each other. Relationships among indifference curves beer B C A HL4 HL3 HL2 HL1 pizza**Draw indifference curves for blue pens and black pens**(assume that they are equally desirable). Draw your indifference curves for coffee and coffee mates (assuming that you must have two coffee mates for each cup of coffee) Important examples**Suppose one of your indifference curves goes through two**baskets, (7, 2) and (6, 5). You currently have (7, 2). Which trade would you like to accept? “I’ll give you four beers to exchange for a pizza.” “I’ll give you two beers for a pizza.” “I’ll give you three beers for a pizza.” Introduce the concept of marginal value beer * 5 * 2 A pizza 6 7**Marginal value**• The 7th pizza is worth exactly 3 beers. • “the marginal value of the 7th pizza equals 3 beers.” • Def: The marginal value of X in term of Y is the units of Y for which the consumer would be just willing to trade on one unit of X.**If you would like to exchange two bears for a pizza, the**marginal value of that pizza in your mind equals two beers. the marginal value of a pizza at the basket (7,2) = the slope of IC at (7,2) The steeper the indifference curve, the greater the marginal value of a pizza. Marginal value as a slope of an indifference curve beer Indifference Curve (IC) tangent line A 2 7 pizza**What is the marginal value of dime in terms of nickels?**What about the case of coffee-coffee mates? Example**Why?**A: A starving person who have many bottles of beers would not like beers. B: A thirsty person who have many pieces of pizzas would not like pizzas. 5. Indifference curves are usuallyconvex. beer A B pizza**Summarize the properties of IC:**• Use indifference curves to describe preference: • a collection of baskets all of which you consider equally desirable • Properties of well-behaved IC: • Slope downward (usually true) • More is better (usually true) • Never cross (always true) • Fill the entire plane (usually true) • Convex (usually true) • Slope of the indifference curve • Indicate the subjective value of x in terms of y; • ‘Marginal value of x in terms of y’**Exceptions**Properties of well-behaved IC: • Slope downward (usually true) Exception- coffee/coffee mates • More is better (usually true); Exception- coffee/coffee mates • Never cross (always true) – no exceptions • Fill the entire plane (usually true) Exception- discrete commodity space • Convex (usually true) Exception- nickels/dimes; coffee/coffee mates