1. Copyright © 2011 Cengage Learning 21 The Theory of Consumer Choice

2. Copyright © 2010 Cengage Learning Figure 1 The Consumer’s Budget Constraint (1) Copyright © 2011 Cengage Learning

3. Figure 1 The Consumer’s Budget Constraint (2) Quantity of pizza Quantity of cola 0 Consumer’s budget constraint 500 B 100 A Copyright © 2011 Cengage Learning

4. Figure 1 The Consumer’s Budget Constraint Quantity of pizza Quantity of cola 0 Consumer’s budget constraint 500 B 250 50 C 100 A Copyright © 2011 Cengage Learning

5. Figure 2 The Consumer’s Preferences Quantity of pizza Quantity of cola 0 Indifference curve,I1I1 I2I2 C B A D Copyright © 2011 Cengage Learning

6. Figure 2 The Consumer’s Preferences Quantity of pizza Quantity of cola 0 Indifference curve,I1I1 I2I2 1 MRS C B A D Copyright © 2011 Cengage Learning

7. Figure 3 The Impossibility of Intersecting Indifference Curves Quantity of pizza Quantity of cola 0 C A B Copyright © 2011 Cengage Learning

8. Figure 4 Bowed Indifference Curves Quantity of pPizza Quantity of cola 0 Indifference curve 8 3 A 3 7 B 1 MRS = 6 1 MRS = 1 4 6 14 2 Copyright © 2011 Cengage Learning

9. Figure 5 Perfect Substitutes and Perfect Complements (1) 50 cent 0 10 cent (a) Perfect substitutes I1I1 I2I2 I3I3 3 15 2 10 1 5 Copyright © 2011 Cengage Learning

10. Figure 5 Perfect Substitutes and Perfect Complements (2) Right shoes 0 Left shoes (b) Perfect complements I1I1 I2I2 7 7 5 5 Copyright © 2011 Cengage Learning

11. Figure 6 The Consumer’s Optimum Quantity of pizza Quantity of cola 0 Budget constraint I1I1 I2I2 I3I3 Optimum A B Copyright © 2011 Cengage Learning

12. Figure 7 An Increase in Income Quantity of pizza Quantity of cola 0 New budget constraint I1I1 I2I2 2.... raising pizza consumption... 3.... and cola consumption. Initial budget constraint 1. An increase in income shifts the budget constraint outward... Initial optimum New optimum Copyright © 2011 Cengage Learning

13. Figure 8 An Inferior Good Quantity Of pizza Quantity of cola 0 Initial budget constraint New budget constraint I1I1 I2I2 1. When an increase in income shifts the budget constraint outward... 3.... but cola consumption falls, making cola an inferior good. 2.... pizza consumption rises, making pizza a normal good... Initial optimum New optimum Copyright © 2011 Cengage Learning

14. Figure 9 A Change in Price Quantity of pizza Quantity of cola 0 1,000 D 500 B 100 A I1I1 I2I2 Initial optimum New budget constraint Initial budget constraint 1. A fall in the price of cola rotates the budget constraint outward... 3.... and raising cola consumption. 2.... reducing pizza consumption... New optimum Copyright © 2011 Cengage Learning

15. Table 1 Income and Substitution Effects When the Price of Cola Falls Copyright © 2011 Cengage Learning

16. Figure 10 Income and Substitution Effects Quantity of pizza Quantity of cola 0 I1I1 I2I2 A Initial optimum New budget constraint Initial budget constraint Substitution effect Substitution effect Income effect Income effect B CNew optimum Copyright © 2011 Cengage Learning

17. Figure 11 Deriving the Demand Curve Quantity of cola 0 Demand (a) The consumer’s optimum Quantity of cola 0 Price of colai (b) The demand curve for cola Quantity of colai 250 $2 A 750 1 B I1I1 I2I2 New budget constraint Initial budget constraint 750 B 250 A Copyright © 2011 Cengage Learning

18. Figure 12 A Giffen Good Quantity of meat Quantity of potatoes 0 I2I2 I1I1 Initial budget constraint New budget constraint D A B 2.... which increases potato consumption if potatoes are a Giffen good. Optimum with low price of potatoes Optimum with high price of potatoes E C 1. An increase in the price of potatoes rotates the budget constraint inward... Copyright © 2011 Cengage Learning

19. Figure 13 The Work–Leisure Decision Hours of leisure 0 Consumption € 5,000 100 I3I3 I2I2 I1I1 Optimum 2,000 60 Copyright © 2011 Cengage Learning

20. Figure 14 An Increase in the Wage (1) Hours of leisure 0 Consumption (a) For a person with these preferences.. Hours of labour supplied 0 Wage... the labour supply curve slopes upward. I1I1 I2I2 BC 2 BC 1 2.... hours of leisure decrease... 3.... and hours of labour increase. 1. When the wage rises... Labour supply Copyright © 2011 Cengage Learning

21. Figure 14 An Increase in the Wage (2) Hours of leisure 0 Consumption (b) For a person with these preferences... Hours of labour Supplied 0 Wage... the labour supply curve slopes backward. I1I1 I2I2 BC 2 BC 1 1. When the wage rises... 2.... hours of leisure increase...3.... and hours of labour decrease. Labour supply Copyright © 2011 Cengage Learning

22. Figure 15 The Consumption–Saving Decision Consumption when young 0 Consumption when old € 110 000 100 000 I3I3 I2I2 I1I1 Budget constraint 5,000 € 50 000 Optimum Copyright © 2011 Cengage Learning

23. Figure 16 An Increase in the Interest Rate 0 (a) Higher interest rate raises saving(b) Higher interest rate lowers saving Consumption when old I1I1 I2I2 BC 1 BC 2 0 I1I1 I2I2 BC 1 BC 2 Consumption when old Consumption when young 1. A higher interest rate rotates the budget constraint outward... 1. A higher interest rate rotates the budget constraint outward... 2.... resulting in lower consumption when young and, thus, higher saving. 2.... resulting in higher consumption when young and, thus, lower saving. Consumption when young Copyright © 2011 Cengage Learning