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In this chapter, consumer preferences for various commodities did not change during the analysis. In some situations, however, preferences do change as consumption occurs. Discuss why and how preferences might change over time with the consumption of these two commodities:

a. cigarettes.

b. dinner for the first time at a restaurant with a special cuisine.

Short Answer

Expert verified

a. The consumer's preference for cigarettes will change over time due to relative changes in price and thus the real income.

b. The consumer's preference for dinner will change if other restaurants offer dinner at a lower cost. The change in relative price will shift the consumer's indifference curve accordingly.

Step by step solution

01

Consumer preferences, indifference curve, and the budget line

Consumer behavior theory begins with three basic assumptions about people's preferences for one market basket versus another. These are completeness, transitivity, and willingness to consume more. These three assumptions do not explain consumers' preferences, but they impose a degree of rationality and reasonableness on them.

An indifference curve represents all combinations of available market baskets, which gives an equal level of satisfaction.

A budget line represents all sets of goods for which the total amount of money spent equals income.

The consumer maximizes satisfaction if her market basket is located on the budget line and is the consumer's most preferred combination of goods and services.

02

Preference for cigarettes

The consumer's preference may change over time due to relative changes in the price of cigarettes. The relative change in cigarette price (say increase) will change the real income (decreases) so that the consumer prefers the less costly substitute goods over cigarettes.

Besides, cigarettes are luxury goods whose price elasticity of demand is highly elastic (compared to necessary and normal goods); that is, the quantity demanded changes more than proportionately for any small price change.

Thus, due to a fall in real income, the consumer's indifference curve shifts accordingly, and one can say that the consumer's preference has changed.

03

Preference for a first-time dinner at a restaurant

"A dinner for the first time in a restaurant with special cuisine" is again a luxury good whose price elasticity of demand is highly elastic. Any change in relative price, thereby real income, will significantly change the quantity demanded.

Thus, the consumer's market basket changes to either a higher or lower indifference curve depending on the increase or decrease in the real income. The consumer will prefer only that 'dinner' which lies on her budget line in due course of time.

If the dinner offered by another restaurant is cheaper, the consumer will prefer to dine in that restaurant. Here the third assumption of consumer preference applies, which is that "more is better than less." A consumer can get more food items if it is cheaper.

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Most popular questions from this chapter

Julio receives utility from consuming food (F) and clothing (C) as given by the utility function U(F,C) = FC. In addition, the price of food is \(2 per unit, the price of clothing is \)10 per unit, and Julio's weekly income is $50.

a. What is Julio's marginal rate of substitution of food for clothing when utility is maximized? Explain.

b. Suppose instead that Julio is consuming a bundle with more food and less clothing than his utility-maximizing bundle. Would his marginal rate of substitution of food for clothing be greater than or less than your answer in part a? Explain.

Suppose that Bridget and Erin spend their incomes on two goods, food (F) and clothing (C). Bridgetโ€™s preferences are represented by the utility function U(F, C) = 10FC, while Erinโ€™s preferences are represented by the utility function U(F,C) = 0.20F2C2.

a. With food on the horizontal axis and clothing on the vertical axis, identify on a graph the set of points that give Bridget the same level of utility as the bundle (10, 5). Do the same for Erin on a separate graph.

b. On the same two graphs, identify the set of bundles that give Bridget and Erin the same level of utility as the bundle (15, 8).

c. Do you think Bridget and Erin have the same preferences or different preferences? Explain.

Janelle and Brian each plan to spend $20,000 on the styling and gas mileage features of a new car. They can each choose all styling, all gas mileage, or some combination of the two. Janelle does not care at all about styling and wants the best gas mileage possible. Brian likes both equally and wants to spend an equal amount on each. Using indifference curves and budget lines, illustrate the choice that each person will make.

If Jane is currently willing to trade 4 movie tickets for 1 basketball ticket, then she must like basketball better than movies. True or false? Explain.

Jane receives utility from days spent traveling on vacation domestically (D) and days spent traveling on vacation in a foreign country (F), as given by the utility function U(D,F) = 10DF. In addition, the price of a day spent traveling domestically is \(100, the price of a day spent traveling in a foreign country is \)400, and Jane's annual travel budget is $4000.

a. Illustrate the indifference curve associated with a utility of 800 and the indifference curve associated with a utility of 1200.

b. Graph Jane's budget line on the same graph.

c. Can Jane afford any of the bundles that give her a utility of 800? What about a utility of 1200?

*d. Find Jane's utility-maximizing choice of days spent traveling domestically and days spent in a foreign country.

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