Unit 5 Utility

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1、5TheTheoryofConsumerChoice(PrinciplesofEconomics,Chapter21)THEBUDGETCONSTRAINT:WHATTHECONSUMERCANAFFORDThebudgetconstraintdepictsthelimitontheconsumption“bundles”thataconsumercanafford.Peopleconsumelessthantheydesirebecausetheirspendingisconstrained,orlimited,bythei

2、rincome.Thebudgetconstraintshowsthevariouscombinationsofgoodstheconsumercanaffordgivenhisorherincomeandthepricesofthetwogoods.TheConsumer’sBudgetConstraintTHEBUDGETCONSTRAINT:WHATTHECONSUMERCANAFFORDTheConsumer’sBudgetConstraintAnypointonthebudgetconstraintlineindic

3、atestheconsumer’scombinationortradeoffbetweentwogoods.Forexample,iftheconsumerbuysnopizzas,hecanafford500pintsofPepsi(pointB).IfhebuysnoPepsi,hecanafford100pizzas(pointA).Figure1TheConsumer’sBudgetConstraintQuantityofPizzaQuantityofPepsi0Consumer’sbudgetconstraint50

4、0B100ACopyright©2004South-WesternTHEBUDGETCONSTRAINT:WHATTHECONSUMERCANAFFORDTheConsumer’sBudgetConstraintAlternately,theconsumercanbuy50pizzasand250pintsofPepsi.Figure1TheConsumer’sBudgetConstraintQuantityofPizzaQuantityofPepsi0Consumer’sbudgetconstraint500B25050C1

5、00ACopyright©2004South-WesternTHEBUDGETCONSTRAINT:WHATTHECONSUMERCANAFFORDTheslopeofthebudgetconstraintlineequalstherelativepriceofthetwogoods,thatis,thepriceofonegoodcomparedtothepriceoftheother.Itmeasurestherateatwhichtheconsumercantradeonegoodfortheother.PREFEREN

6、CES:WHATTHECONSUMERWANTSAconsumer’spreferenceamongconsumptionbundlesmaybeillustratedwithindifferencecurves.AnindifferencecurveisacurvethatshowsconsumptionbundlesthatgivetheconsumerthesamelevelofsatisfactionFigure2TheConsumer’sPreferencesQuantityofPizzaQuantityofPeps

7、i0Indifferencecurve,I1I2CBADCopyright©2004South-WesternRepresentingPreferenceswithIndifferenceCurvesTheConsumer’sPreferencesTheconsumerisindifferent,orequallyhappy,withthecombinationsshownatpointsA,B,andCbecausetheyareallonthesamecurve.TheMarginalRateofSubstitutionT

8、heslopeatanypointonanindifferencecurveisthemarginalrateofsubstitution.Itistherateatwhichaconsumeriswillingtotradeonegoodforanother.Itisthe