Consumer Preferences Clothing (units per week) Market basket A is preferred to B Market bas ket B is D preferred to D. B U Food units per week) Chapter 3: Consumer Behavior Slide 21
Chapter 3: Consumer Behavior Slide 21 U2 U3 Consumer Preferences Food (units per week) Clothing (units per week) U1 B A D Market basket A is preferred to B. Market basket B is preferred to D
Consumer Preferences Clothing Indifference Curves (units per week) Cannot Cross The consumer should be indifferent between A, B and D. However, B contains more of both goods than D D Food units per week) Chapter 3: Consumer Behavior Slide 22
Chapter 3: Consumer Behavior Slide 22 U1 U2 Consumer Preferences Food (units per week) Clothing (units per week) A D B The consumer should be indifferent between A, B and D. However, B contains more of both goods than D. Indifference Curves Cannot Cross
Consumer Preferences Clothing 16 Observation The amount (units of clothing given up for per week) 14 a unit of food decreases from 6 to 1 12|-6 10 B Question: Does this relation hold for giving 8642 D up food to get clothing? G Food 12345 units per week) Chapter 3: Consumer Behavior Slide 23
Chapter 3: Consumer Behavior Slide 23 A B D E G -1 -6 1 1 -4 -2 1 1 Observation: The amount of clothing given up for a unit of food decreases from 6 to 1 Consumer Preferences Food (units per week) Clothing (units per week) 1 2 3 4 5 2 4 6 8 10 12 14 16 Question: Does this relation hold for giving up food to get clothing?
Consumer Preferences Marginal rate of Substitution a The marginal rate of substitution (MRS quantifies the amount of one good a consumer will give up to obtain more of another good o It is measured by the slope of the indifference curve Chapter 3: Consumer Behavior Slide 24
Chapter 3: Consumer Behavior Slide 24 Consumer Preferences ◼ The marginal rate of substitution (MRS) quantifies the amount of one good a consumer will give up to obtain more of another good. ⚫ It is measured by the slope of the indifference curve. Marginal Rate of Substitution
Consumer Preferences Clothing 16 (units per week) 14 MRS=6 MRS=-△C △F 12-61 10 B 8642 D MRS= 2 G Food 12345 units per week) Chapter 3: Consumer Behavior Slide 25
Chapter 3: Consumer Behavior Slide 25 Consumer Preferences Food (units per week) Clothing (units per week) 1 2 3 4 5 2 4 6 8 10 12 14 16 A B D E G -6 1 1 1 1 -4 -2 -1 MRS = 6 MRS = 2 F MRS C = −