Microeconomics

Ninth Edition, Global Edition

Chapter 4
Consumer Choice

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Learning Objectives
4.1 Preferences.
4.2 Utility.
4.3 Budget Constraint.
4.4 Constrained Consumer Choice.
4.5 Behavioral Economics.

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Premises of Consumer Behavior
• Individual tastes or preferences determine the amount of
pleasure people derive from the goods and services they
consume.
• Consumers face constraints or limits on their choices.
• Consumers maximize their well-being or pleasure from
consumption, subject to the constraints they face.

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Properties of Consumer Preferences
(1 of 3)

• Completeness—when facing a choice between any two

bundles of goods, a consumer can rank them so that one
and only one of the following relationships is true: The
consumer prefers the first bundle to the second, prefers
the second to the first, or is indifferent between them.

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Properties of Consumer Preferences
(2 of 3)

• Transitivity—a consumer’s preferences over bundles is

consistent in the sense that, if the consumer weakly
prefers Bundle a to Bundle b (likes a at least as much as
b) and weakly prefers Bundle b to Bundle c, the consumer
also weakly prefers Bundle a to Bundle c.

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Properties of Consumer Preferences
(3 of 3)

• More Is Better—all else being the same, more of a

commodity is better than less of it.
– Good—a commodity for which more is preferred to
less, at least at some levels of consumption.
– Bad—something for which less is preferred to more,
such as pollution.

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Preference Maps
• Indifference curve—the set of all bundles of goods that a
consumer views as being equally desirable.
• Indifference map—a complete set of indifference curves
that summarize a consumer’s tastes or preferences.

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Figure 4.1 (1 of 2)
Bundles of Pizzas and Burritos Lisa Might Consume

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Figure 4.1 (2 of 2)
Bundles of Pizzas and Burritos Lisa Might Consume

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Properties of Indifference Map
1. Bundles on indifference curves farther from the origin are
preferred to those on indifference curves closer to the
origin.
2. An indifference curve goes through every possible
bundle.
3. Indifference curves cannot cross.
4. Indifference curves slope downward.

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Figure 4.2
Impossible Indifference Curves
(a) Crossing (b) Upward Sloping (c) Thick

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Solved Problem 4.1
• Can indifference curves be thick?
• Answer:
– Draw an indifference curve that is at least two bundles
thick, and show that a preference property is violated.

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Willingness to Substitute Between
Goods
• Marginal rate of substitution (M R S)—the maximum
amount of one good a consumer will sacrifice to obtain
one more unit of another good.
• Lisa’s marginal rate of substitution of burritos for pizza is

B
MRS 
Z

where M R S is the slope of the indifference curve.

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Figure 4.3 (1 of 2)
(a) Marginal Rate of Substitution
(a) Plausible: Indifference Curve Convex to the Origin

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Figure 4.3 (2 of 2)
(b) Marginal Rate of Substitution
(b) Implausible: Indifference Curve Concave to the Origin

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Curvature of Indifference Curves (1 of 2)
• Casual observation suggests that most people’s
indifference curves are convex to the origin.
• Diminishing marginal rate of substitution: The marginal
rate of substitution approaches zero as we move down
and to the right along an indifference curve.

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Curvature of Indifference Curves (2 of 2)
• Special Cases:
– Perfect substitutes—goods that a consumer is
completely indifferent as to which to consume.
– Perfect complements—goods that a consumer is
interested in consuming only in fixed proportions.

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Figure 4.4 (1 of 3)
(a) Perfect Substitutes

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Figure 4.4 (2 of 3)
(b) Perfect Complements

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Figure 4.4 (3 of 3)
(c) Imperfect Substitutes

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Application: Indifference Curves
Between Food and Clothing

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Utility
• Utility—a set of numerical values that reflect the relative
rankings of various bundles of goods.
• Utility function—the relationship between utility values
and every possible bundle of goods: U(Z, B)

U  Z, B   ZB

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Ordinal Preferences
• If we only know a consumer’s relative ranking of bundles,
the measure of pleasure is ordinal.
– Tells us the relative ranking of two things but not how
much more one rank is than another (letter grades).
• A cardinal measure is one by which absolute
comparisons between ranks may be made. Money is a
cardinal measure.

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Utility and Indifference Curves
• An indifference curve consists of all those bundles that
correspond to a particular level of utility.
• If Lisa’s utility function is U(Z, B), then an indifference
curve is given by

U  U  Z, B 

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Figure 4.5 (1 of 2)
(a) The Relationship Between the Utility Function and
Indifference Curves

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Figure 4.5 (2 of 2)
(b) The Relationship Between the Utility Function and
Indifference Curves

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Marginal Utility
• Marginal utility—the extra utility that a consumer gets
from consuming the last unit of a good.
– The slope of the utility function as we hold the quantity
of the other good constant.
• Marginal utility of good Z is:
U
MUZ 
Z

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Figure 4.6
Utility and Marginal Utility
(a) Utility (b) Marginal Utility

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Utility and Marginal Rates of
Substitution
• The M R S is the negative of the ratio of the marginal utility
of another pizza to the marginal utility of another burrito.
• Formally,

B MUZ
MRS  
Z MUB

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Budget Constraint (1 of 4)
• Budget line (or budget constraint)—the bundles of
goods that can be bought if the entire budget is spent on
those goods at given prices.
• Opportunity set—all the bundles a consumer can buy,
including all the bundles inside the budget constraint and
on the budget constraint.

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Budget Constraint (2 of 4)
• If Lisa spends all her budget, y, on pizza and burritos, then

pB B  pZ Z Y

– where pB B is the amount she spends on burritos and

pZ Z is the amount she spends on pizzas.

• This equation is her budget constraint.

– It shows that her expenditures on burritos and pizza
use up her entire budget.

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Budget Constraint (3 of 4)
• How many burritos can Lisa buy?
– To answer, solve budget constraint for B (quantity of
burritos):

pB B  pZ Z Y

pB B Y  pZ Z

Y pZ
B  Z
pB pB

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Budget Constraint (4 of 4)
• From previous slide we have:
Y pZ
B  Z
pB pB

– Lisa can buy more burritos with a higher income, a

lower price of burritos or pizza, or if she buys fewer
pizzas.
– If pZ  $1, pB  $2, and Y  $50, then:

$50 $1 1
B  Z  25  Z
$2 $2 2

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Allocations of a $50 Budget Between
Burritos and Pizza
Table 4.1 Allocations of a $50 Budget Between Burritos and
Pizza

Bundle Burritos Pizza

a 25 0
b 20 10
c 10 30
d 0 50

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Figure 4.7
Budget Constraint

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Slope of the Budget Constraint
• We have seen that the budget constraint for Lisa is given
by the following equation:

– The slope of the budget line is also called the

marginal rate of transformation (M R T).

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Solved Problem 4.2
• Initially, a consumer chooses between water and a
composite of other goods. Given her budget and current
prices, Manaswini can afford 3,000 gallons of water a
month if she buys nothing else. If she does not purchase
water, she can afford 100 units of all other goods. The
government begins to ration water, setting a quota of
2,500 gallons of water a month that a consumer may
purchase. How does Manaswini’s budget line change?
How does her opportunity set change?

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Solved Problem 4.2: Answer

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Figure 4.8 (1 of 2)
(a) Changes in the Budget Constraint: Price of Pizza Doubles

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Figure 4.8 (2 of 2)
(b) Changes in the Budget Constraint: Income Doubles

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Solved Problem 4.3
Is Lisa better off if her income doubles or if the prices of both
the goods she buys fall by half?
Answer: Her budget line and her opportunity set are the
same with either change.

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Constrained Consumer Choice
• Given information on Lisa’s preferences and how much
she can spend, we can determine her optimal bundle.
• Her optimal bundle is the bundle out of all the bundles that
she can afford that gives her the most pleasure.

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Figure 4.9 (1 of 2)
Consumer Maximization, Interior Solution

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Figure 4.9 (2 of 2)
Consumer Maximization, Interior Solution

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Solved Problem 4.4
• Nate’s utility function over jelly and peanut butter is U = JN.
Nate’s marginal utility from jelly is MU J = N, and his marginal
utility from peanut butter is MU N = J. The price of a jar of jelly
is $5. The price of a jar of peanut butter is $10. Nate has a
budget of $100 to allocate to these two items. If Nate
maximizes his utility, how much of each good does he
consume?

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Solved Problem 4.4: Answer
1. Derive Nate’s budget line by setting his expenditure equal
to his budget.
2. Find the relationship between N and J.
3. Substitute this utility-maximizing condition into the budget
equation to determine J and N.
4. Substitute the solution for J into the budget line to solve
for N.

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Figure 4.10
Consumer Maximization, Corner Solution

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Solved Problem 4.5
• The concentration of the active ingredient, sodium hypochlorite,
in Clorox is twice that of the generic brand. Consequently, Chris
views one cup of Clorox to be a perfect substitute for two cups of
the generic. If Clorox costs $3 gallon, the generic costs $1, and
Chris allocates Y = $6 per year for bleach, what bundle does
Chris buy? If the price of Clorox falls to $2, how does Chris’s
behavior change?

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Solved Problem 4.5: Answer
(a) Price of Clorox is $3 a Gallon (b) Price of Clorox is $2 a Gallon

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Figure 4.11
Optimal Bundles on Convex Sections of Indifference Curves
(a) Strictly Concave (b) Concave and Convex
Indifference Curves Indifference Curves

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Food Stamps (1 of 2)
• The U.S. Food Stamp Plan started in 1939.
• Renamed to Supplemental Nutrition Assistance Program (SNA P)
in 2008.
• 39 million people receive food stamps at a cost of $56 billion in
2019. The average benefits were $136 per person per month or
$4.47 per day, in 2020.
• In 2020, the U.S. Department of Agriculture reported that 41% of
SNA P households had children, 21% had disabled people, and
26% included senior citizens.
• The COVID-19 pandemic increased the incidence of food
insecurity, making food stamps of even great importance.

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Food Stamps (2 of 2)
• Would a switch to a comparable cash subsidy instead of
food stamps to increase the well-being of people who
receive food assistance?
• Would recipients spend less on food and more on other
goods?

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Figure 4.12
Food Stamps Versus Cash

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Behavioral Economics
• By adding insights from psychology and empirical
research on human cognition and emotional biases to the
rational economic model, economists try to better predict
economic decision making.

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Test of Transitivity
• Adults tend to make transitive choices.
• Children are less likely to make transitive choices.

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Endowment Effect
• People place a higher value on a good if they own it than
they do if they are considering buying it.
• Consumer choice theory assumes a consumer’s
endowment does not affect the indifference curve map.
• Research has shown that experience significantly reduces
the endowment effect.

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Salience and Bounded Rationality
• People are more likely to consider information if it is
presented in a way that grabs their attention or if it takes
relatively little thought or calculation to understand.
– For example, tax salience is awareness of a tax.
• When a store’s posted prices exclude the sales tax,
consumers are much less likely to react to a change in the
price.
• Tax is not salient and some consumers ignore taxes.
• Bounded rationality—people have a limited capacity to
anticipate, solve complex problems, or enumerate all
options.

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Why Americans Buy More eBooks
Than Do Germans

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