1. TOPICS FOR FURTHER STUDY7
TOPICS FOR FURTHER STUDY

2. The Theory of Consumer Choice21
The Theory of Consumer Choice

3. The Consumer’s Budget Constraint

4. Figure 1 The Consumer’s Budget Constraint
Quantity
of Pepsi
500 B
Consumer’s
budget constraint
100 A
Quantity
of Pizza
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5. Figure 1 The Consumer’s Budget Constraint
Quantity
of Pepsi
500 B
Consumer’s
budget constraint
250 50 C
100 A
Quantity
of Pizza
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6. Figure 2 The Consumer’s Preferences
Quantity I2
Indifference
curve, I1
of Pepsi C B D A
Quantity
of Pizza
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7. Figure 2 The Consumer’s Preferences
Quantity I2
Indifference
curve, I1
of Pepsi C B D 1
MRS A
Quantity
of Pizza
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8. Figure 2 The Consumer’s Preferences
Quantity I2
Indifference
curve, I1
of Pepsi C B D A
Quantity
of Pizza
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9. Figure 2 The Consumer’s Preferences
Quantity
Indifference
curve, I1
of Pepsi
Quantity
of Pizza
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10. Figure 3 The Impossibility of Intersecting Indifference Curves
Quantity
of Pepsi C A B
Quantity
of Pizza
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11. Figure 4 Bowed Indifference Curves
Quantity
of Pepsi
Indifference
curve 14 2 1
MRS
= 6 8 3 A 4 6 3 7 B 1
MRS
= 1
Quantity
of Pizza
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12. Figure 5 Perfect Substitutes and Perfect Complements
(a) Perfect Substitutes
10p coins 15 I3 10 I2 5 I1 3 1 2
50p coins
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13. Figure 5 Perfect Substitutes and Perfect Complements
(b) Perfect Complements
Left
Shoes I1 I2 7 5
Right Shoes
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14. Figure 6 The Consumer’s Optimum
Quantity I3
of Pepsi I2
Budget constraint I1
Optimum B A
Quantity
of Pizza
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15. Figure 7 An Increase in Income
Quantity
of Pepsi
New budget constraint I2
1. An increase in income shifts the
budget constraint outward . . . I1
New optimum
and
Pepsi
consumption.
Initial
optimum
Initial
budget
constraint
Quantity
raising pizza consumption . . .
of Pizza
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16. Figure 8 An Inferior Good
Quantity
of Pepsi
New budget constraint I2 I1
1. When an increase in income shifts the
budget constraint outward . . .
but
Pepsi
consumption
falls, making
Pepsi an
inferior good.
Initial
optimum
New optimum
Initial
budget
constraint
Quantity
pizza consumption rises, making pizza a normal good . . .
of Pizza
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17. Figure 9 A Change in Price
Quantity
of Pepsi
New budget constraint
1,000 D I1 I2
New optimum
1. A fall in the price of Pepsi rotates
the budget constraint outward . . .
500 B
100 A
and
raising Pepsi
consumption.
Initial optimum
Initial
budget
constraint
Quantity
reducing pizza consumption . . .
of Pizza
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18. Figure 10 Income and Substitution Effects
Quantity
of Pepsi I2 I1
New budget constraint C
New optimum
Income
effect
Income effect B A
Initial optimum
Initial
budget
constraint
Substitution
effect
Substitution effect
Quantity
of Pizza
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19. Table 1 Income and Substitution Effects When the Price of Pepsi Falls
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20. Figure 11 Deriving the Demand Curve
(a) The Consumer ’
s Optimum
(b) The Demand Curve for Pepsi
Quantity
Price of
of Pepsi
Pepsi
New budget constraint I2
Demand
750 B
250 $2 A I1
750 1 B
250 A
Initial budget
constraint
Quantity
Quantity
of Pizza
of Pepsi
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21. Figure 12 A Giffen Good Quantity of Potatoes Initial budget constraint
Optimum with high
price of potatoes I2
Optimum with low
price of potatoes D E
which
increases
potato
consumption
if potatoes
are a Giffen
good.
1. An increase in the price of
potatoes rotates the budget
constraint inward . . . C
New budget
constraint
Quantity
of Meat
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22. Figure 13 The Work-Leisure Decision
Consumption I3 I2
€ 5,000
100 I1
Optimum
2,000 60
Hours of Leisure
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23. Figure 14 An Increase in the Wage
(a) For a person with these preferences
. . .
. . . the labor supply curve slopes upward.
Consumption
Wage
Labor
supply I2 I1
1. When the wage rises . . .
BC1
BC2
Hours of
Hours of Labor
hours of leisure decrease . . .
and hours of labor increase.
Leisure
Supplied
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24. Figure 14 An Increase in the Wage
(b) For a person with these preferences
. . .
. . .
the labor supply curve slopes backward.
Consumption
Wage
Labor
supply
BC2
1. When the wage rises . . . I2 I1
BC1
Hours of
Hours of Labor
hours of leisure increase . . .
and hours of labor decrease.
Leisure
Supplied
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25. Figure 15 The Consumption-Saving Decision
Budget
constraint
when Old I3
€ 110,000
100,000 I2 I1
55,000
€ 50,000
Optimum
Consumption
when Young
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26. Figure 16 An Increase in the Interest Rate
(a) Higher Interest Rate Raises Saving
(b) Higher Interest Rate Lowers Saving
Consumption
Consumption
when Old
when Old
BC2
BC2
1. A higher interest rate rotates
the budget constraint outward . . .
1. A higher interest rate rotates
the budget constraint outward . . . I2 I1 I1 I2
BC1
BC1
Consumption
Consumption
resulting in lower
consumption when young
and, thus, higher saving.
resulting in higher
consumption when young
and, thus, lower saving.
when Young
when Young
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