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Answers Microeconomics: 3 Consumer Choice

This document discusses consumer choice and microeconomic concepts including: 1) Budget lines showing consumption combinations of two goods with a limited income. 2) Indifference curves representing combinations of goods that provide equal utility or satisfaction to a consumer. 3) How a consumer will choose the highest indifference curve that can be afforded within their budget line.

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yogesh gunawat
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86 views3 pages

Answers Microeconomics: 3 Consumer Choice

This document discusses consumer choice and microeconomic concepts including: 1) Budget lines showing consumption combinations of two goods with a limited income. 2) Indifference curves representing combinations of goods that provide equal utility or satisfaction to a consumer. 3) How a consumer will choose the highest indifference curve that can be afforded within their budget line.

Uploaded by

yogesh gunawat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Answers Microeconomics

3 Consumer choice

01 Budget line
a Good B

60

Good A
100

01 Budget line (01 a continued)


b
Good B

72
60

Good A
100 120

01 Budget line (01 a continued)


c
Good B
75
60

Good A
100

AMICR3.DOC Page 1 (of 3) 3 Consumer choice 08/06/2016


02 Indifference curve 1
IC2

Good B
b

IC1
c a
IC1
IC2

Good A
At point a, IC1 and IC2 have the same total utility, whereas at b and c, IC2 (point b)
has a higher utility than IC1 (point c) because more of B can be consumed. However,
an indifference curve shows combinations of goods with the same total utility.

03 Indifference curve 2
Good B

Indifference
curve?

possible not possible


Good A
No, an indifference curve cannot rise because more of A and more of B would be
consumed. This would imply a higher total utility level and, hence, a higher utility
curve.

04 Consumer choice
Good B

c
a
IC3
IC1 IC2
Good A

Budget line
a IC2 is the highest indifference curve where the whole income is spent.
b lC1 is a lower indifference curve than IC2 even if the whole income is spent.
c IC3 is not affordable because the income is too small.

AMICR3.DOC Page 2 (of 3) 3 Consumer choice 08/06/2016


05 Complements and substitutes

Good B
Budget line (Bl) 1
Bl 2
Good A
A and B are substitutes because the cross-price elasticity of demand
%change quantity demanded B
( %change price A ) is positive: Both numerator and denominator are
positive and - consequently - the result, too.

06 Normal and inferior goods


Good B

IC2
Bl 1 IC1 Bl 2
Good A

A is a normal good, B an inferior good. Good A has a positive income elasticity of


%change in quantity demanded
demand ( %change in income ), whereas good B has a negative income
elasticity of demand.

 Back to questions. Click here!

AMICR3.DOC Page 3 (of 3) 3 Consumer choice 08/06/2016

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