Chapter 3
Chapter 3
with Calculus
Fifth Edition, Global Edition
Chapter 3
A Consumer’s Constrained
Choice
E¥¥=Ii¥X
eg ( 313 ,
I ,
3.1 Preferences (1 of 2)
1313,2A )
consumer gets from consuming each. highpleasune "S -
( 213.3 A)
a at
a is or
→
I –
= is used to convey weak preference equal to b
by a is impossible
= –
I ~ is used to convey indifferent (e.g. a ~ b)
a is equal to b.
Preference System
3.1 Preferences (2 of 2) "
¥i¥T ¥
" "
"
Assume axiom -
• Properties of preferences:
1. Completeness 10A ,
513 ) ¥ ( IA 413)
,
:¥ a→_z
I
▪ Consumers’ rankings are logically consistent in the
sense that if a ! b and b ! c, then a ! c.
3. More is Better →
eg (3A .
3 B) > ( 3A ,
213 )
▪ All else the same, more of a commodity is better than less.
▪ In this regard, a “good” is different than a “bad.”
free disposal Copyright © 2022 Pearson Education Ltd
tYEB
"
"
B- than set
/
more
too
.
②
goods: elf :S better eis the A better than see
:
'
more
benchmark
"
: more
x> e
belong
>
I
,
I
I 0k
'
+
> C , T
1 It
. -
9- - - -
f- -
z
.
-
. -
e :
y
:p
Indifference map
µoreisbetter_
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?⃝
x >e
*
C ① e > y
✗
x
'
C
+
5¥ .
☒ E.TK
"
C
+ Indifference curve
" "
passing through e
e
+
✗
y
✗ Indifference
④ curve
Cne
one
'
c 're
C
+
✗
f-
d
✗
Iz
-4
.
curve
f :
'
:
B TX - F Ix
✗ X
Cop ,
0 B)
✗
p
3.1 Indifference Curves (1 of 2)
• The set of all bundles of goods that a consumer views as
being equally desirable can be traced out as an
indifference curve.
• Five important properties of indifference curves:
1. Bundles on indifference curves farther from the origin
are preferred to those on indifference curves closer to ✓
the origin.
2. Every bundle lies on an indifference curve.
3. Indifference curves cannot cross.
4. Indifference curves slope downward.
5. Indifference curves cannot be thick.
technical
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3.1 Indifference Curves (2 of 2)
• Impossible indifference curves:
13A 213)
.
(3.01A ,
2. ☐ I B)
] They can't
in the same
bra '
.
-
' #
e~b : I b>a - -
more is better
.
e- a -22
- '
bra transitivity
'
* '
9 = ( 2. 2) ✓(a) = 30 ①
3.2 Utility (1 of 2) D=
( =
( 1. 3)
(3 , 1)
✓ (b)
✓ (c)
=
=
20
25
②
③
u (g) =
is
3.2 Utility (2 of 2)
OXIlikex-uhemorethany.fr
number only for compare
Y= 113,13 )
Uz=q,,qC
U ,
(d) =
12
y > x
a- (g) =
Uz (d) =
16×9=4212
ysx
Us (g) = 1135
418.84
→ a
⑨ 2
Indifference curve
4- =
Ulq ,qa) ,
I want to find of , ,
qz Sit subs .
q > 92
, Into
Ulqi Az) = Ñ
/4=q±q
possible value : 14,4) Gz ;
Convex
downward
curve
slope )
16 -
too
116,1 ) ;
I Ilñ=6)
4=q,±q ? (1/16)
④ =(q±q:p
! 4-
/ •
zlñ=4)
- -
-
l -
- - - - -
• - -
qz=¥
' '
16=9,9 , =/ bqi I 1
! Ari
,
4 16
dd÷= -146)q?=_q¥
y=Ilx)
If G , T 1- unit , Gabby -1¥ unit
←
Indifference curve
3.2 Willingness to Substitute Between
Goods ÷
¥ P¥¥¥tti÷¥
• Marginal Rate of Substitution (MRS) is the maximum amount
of one good that a consumer will sacrifice (trade) to obtain one
more unit of another good.
– It is the slope at a particular point on the indifference curve
– MRS = dq2 / dq1 5=4 =qqC
1- unit of q
&÷
If you ask me
give up
÷
,
,
= -
÷ ?
;
'
! ! ÷
3 b
q
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← tangent line
µ
I. 7
every peon
untune
)
a
16 - - - -
-
ooo
:
tangent line with the slope =dd÷
÷
÷
÷
For U=q,qC
For particular Indifferce curve
ñ=4
a- it eg
¥•=÷
d¥• -4¥
.
a#
lñq÷
As tangent line
¥ more flatter
negative slope
,,
less
3.2 Marginal Utilities and Marginal Rate of
Substitution for Five Utility Functions
¶U (q1, q2 ) ¶U (q1, q2 ) U1
U left parenthesis q subscript 1, q subscript 2 right U subscript 1 equals start fraction partial differential U left U subscript 2 equals start fraction partial differential U left M R S equals negative U subscript 1 over U subscript 2.
parenthesis parenthesis q subscript 1, q subscript 2 right parenthesis, parenthesis q subscript 1, q subscript 2 right parenthesis,
U (q1, q2 ) U1 = U2 = MRS = -
over partial differential q subscript 1 end fraction. over partial differential q subscript 2 end fraction.
Utility Function
¶q1 ¶q2 U2
iq1 + jq2 i
i q subscript 1 + j q subscript 2. negative i over j.
i j
Perfect substitutes i.j > o -
j
min(iq1, jq2 )
Min left parenthesis i q subscript 1, j q subscript 2 right
Perfect complements parenthesis.
0 0 0
q subscript 1 superscript a, q subscript 2 superscript 1 minus a. a start fraction U left parenthesis q subscript 1, q subscript 2 Left parenthesis 1 minus a right parenthesis start fraction U left Negative start fraction a over 1 minus a end fraction q subscript
U (q1, q2 ) U (q , q ) a q2
right parenthesis over q subscript 1 end fraction. parenthesis q subscript 1, q subscript 2 right parenthesis over q 2 over q subscript 1.
(1 - a ) 1 2
subscript 2 end fraction.
Cobb-Douglas qq a 1-a
a -
1 2
q1 q2 1 - a q1
Left parenthesis q subscript 1 superscript rho plus q subscript 2 Left parenthesis q superscript rho subscript 1 baseline plus q Left parenthesis q superscript rho subscript 1 baseline plus q Negative left parenthesis q subscript 1 over q subscript 2 right
Constant Elasticity of superscript rho right parenthesis superscript 1 over rho. superscript rho subscript 2 baseline right parenthesis superscript rho subscript 2 baseline right parenthesis
r-1
parenthesis superscript rho minus 1.
æq ö
superscript start fraction left parenthesis 1 minus rho right superscript start fraction left parenthesis 1 minus rho right
r
(q + q ) r 1/ r r
(q + q ) r (1-r )/ r r-1
(q1r + q2r )(1-r )/r q2r-1
parenthesis over rho end fraction baseline times q superscript parenthesis over rho end fraction baseline times q superscript
Substitution 1 2 1
rho minus 1 subscript 1 baseline
2 q 1
rho minus 1 subscrupt 2 baseline.
-ç 1 ÷
(CES)
è q2 ø
u left parenthesis q subscript 1 right parenthesis plus q subscript Start fraction d u left parenthesis q subscript 1 right parenthesis Negative start fraction d u left parenthesis q subscript 1 right
2.
du(q1 )
over d q subscript 1 end fraction.
1 du(q1 )
parenthesis over d q subscript 1 end fraction.
Quasilinear
u(q1 ) + q2 -
dq1 dq1
Notes: i > 0, j > 0, 0 < a < 1, ρ ≠ 0, and ρ < 1. We are evaluating the perfect
complements’ indifference curve at its right-angle corner, where it is not
differentiable; hence the formula MRS = -U1 / U2 is not well defined. We arbitrarily
say that the MRS = 0 because no substitution is possible.
more
will if
How much
my utility increase I consume one
of q ,
Mllq ,
= To -4=0.4721 (
discrete
change) .
Ela:-)
÷
MU ,
=
¥ .
=
a.
l > at 14.4) MU ,
t
constant
=L (4)
±
(4) =
I (4)
°
=
d-
q?
±
MV, =
I q,
±
1T¥ =
It :) a. q ,
" "
MU
Diminishing
?⃝
sage
y= f- (dirks )
%¥÷
2X , Xz
e.g .
y= +
AX 1
1- 1- Ax .
Ay
=
? AX ,
If
, = =
Ax
Totad?at¥
,
=
,
Mat
pq
MUZT
,
dy<=¥⑦dx< t¥ ,
,
DX .
U =
U (q , ,
qz )
24181,82) 041 G. %)
du = dq ,
+
dqz
2g , 2 G-
du -
- o
I
o =
JG ,
dq ,
+
¥ dqz
>o
MI
dd%-
24/28
Def of MRS
,
.
= =
-
=
-
< ☐
ou /zq , µ Uz
> o
MRS = -
MI not
only for u=q,qC
Mu ,
AS q.T.MU , I
1 MHz depends
e.g .
perfect substitutes 0
For Cobb -
Dog / us .
q?
✗
u= G. ( t.PH
"" )
specific form :
u=q?q ,
( ☐ <✗ < 1)
MU ,
-_ ✗ qi-lqs.HN
Iq (1-2)
-
""
=
aq , ,
=
4%-14-4
Murli a) q ? q?
-
"✗ -4-21
MU ,
-_ ✗
( F.) qitq ,
MU .
-_ ( 1- d) 1¥ )✗
.
dull
*
,
= ✗ 1-(1%4) qzlialq ,
- a- a) -1
Lo
" -4
dYqY-= q.iq
-
✗ a- d) so
,
3.2 Marginal Utility and MRS
• The MRS depends on how much extra utility a consumer
gets from a little more of each good.
– Marginal utility is the extra utility that a consumer gets
from consuming the last unit of a good, holding the
consumption of other goods constant.
¶U Gz
marginal utility of pizza = = U1 dd÷
¶q1 +
dq 2 ¶U / ¶q1 U1
MRS = =- =-
dq1 ¶U / ¶q2 U2
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3.2 Curvature of Indifference
Curves (1 of 4)
• MRS (willingness to trade) diminishes along many typical
indifference curves that are concave
- to the origin.
cover
U ( =
mi n
q , , q a)
U = i q, tj a a
=
of , 1- ofa
g-
= 2
L
① -
-
-
, U= to
¥
3.2 Curvature of Indifference 4
-
"
Curves (2 of 4) 1=2,5-1 2-
U( C. G) = 2C 1- G e
-2
• Perfect Substitutes I 1
I 2 ,
– Goods that a consumer is completely indifferent
between
– Example: Clorox (C) and Generic Bleach (G)
U (C,G ) = iC + jG (: > o . 's > o )
– MRS = −2 (constant)
• Perfect Complements
– Goods that are consumed in fixed proportions
slope = - w
→
– Example: Apple pie (A) and Ice cream (I)
U ( A,V ) = min(iA, jV )
– MRS is undefined
yvertexysb.pe
•
-_ 0
ya
,
,
G. EIT
– Cobb-Douglas utility function .
U ( q1, q2 ) = q1aq21-a
indifference curves never
hit the axes.
– Quasilinear utility function
U ( q1, q2 ) = u(q1 ) + q2 IF tqz
=
w →
two
d¥=o
/ ☒of the axes.
indifference curves hit one
concave <o 45-1*7-17=3143-3-41Movie .tt#.t
Copyright © 2022 Pearson Education Ltd
I
Ula .az/--qiqI'
"
ga
,
s
a)
q.aq.ci
-
a- =
>
>
s
qia )÷a
(
-4
)÷a=(
"
q
.
a-
ai
9. ,
qz=(ñ)÷a(qj¥ qz=f(a.)
=lu¥÷ ñT a- at
d÷ ,
-_ MRS
For Quasi linear
⑥ 2
Ulq , ,
qz) =
tqz
"^ "" "
"
:\ the org'm
= @+ q .
!
i.
a. = a- -
E ֥
Ti Large Gi
Gi Gi
for q =o q ,
= a-
t
,
for 82=0 q =
(Ñ ) '
±q
,
MRS = -
¥ = -
= -
±¥ ,
+ coz
e.g u=
"
Ui-l-7-w://onlybuyq.it/-U.S1-
3.2 Curvature of Indifference
Curves (4 of 4)
• Indifference curves between food and clothing
– At relatively low quantities of food and clothing,
^
Poor indifference curves, I 1,
+
are nearly right angles:
Perfect complements
– At relatively high quantities
T
rich indifference curves, I 4 ,
become flatter: Perfect
substitutes K
• Example:
– Assume p1 = $1, p2 = $2 and Y = $50
– Rewrite the budget line equation for easier graphing
(y=mx+b form):
$50 - ($1´ q1 ) 1
q2 = = 25 - q1
$2 2
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%÷=
jz¥¥¥u
-2
nrs→É¥¥u
3.3 Budget Constraint (2 of 2)
P¥¥¥-ÉÉ¥
• Marginal Rate of Transformation (MRT) is how the
market allows consumers to trade one good for another.
dq 2 p
– It is the slope of the budget line: MRT = =- 1
dq1 p2
e¥-¥,=¥ .
JP ,
uaxulG.io#Y:::ae
U1 U2
=
Sit P
,
q.tl?qz=Y/ p1 p2
Tf , , qz → choice Jari able Copyright © 2022 Pearson Education Ltd
"
solution =
optimal bundle
g. > ,
,
3.4 Constrained Consumer Choice (2 of 2)
• The interior solution that maximizes utility without going
beyond the budget constraint is Bundle e.
• The interior optimum is where MRS = - U1 = - p1 = MRT
U2 p2
Gz Y<#
✗
.
•• I}
• "
q¥
I2
# ± .
•
¥ .
C
G,
Tq
*
,
I ,
✗
G. =o
,
P, = $1 82=0 13=5/2
MU ,
(o) =
4 , Muz ( o) = 2
First $1 Y÷=4 ,
¥ =L
G. =
¥
MU , (E) =3
2nd $ ¥ =3 ,
¥ =/
a. =L Example :
t bundle C
,
¥ ¥ >
.
use $ to
good 1
3.4 Constrained Consumer Choice with
Perfect Complements
• The optimal bundle is on the budget line and at the right
angle (i.e. vertex) of an indifference curve.
Q : It is possible to have
MRT
concave
¥
3.4 Consumer Choice with Calculus (1 of 2)
• Our graphical analysis of consumers’ constrained choices
can be stated mathematically: Problem forced
max U (q1, q2 ) by consumer
q1, q2
S.tl?q,tPzqz--Y -
. -
-
:>
Solution : MRS =
MRT
=
÷= -
¥
aqa-iq.la =
qiq
a
4- a)
-
÷a,aiqi=P¥ -
①
- - -
G- =¥ Gi Ñ=¥aPzGz
combine D. ②
¥a Pzcfztpaq =Y ,
Tq ,*=a¥J
"
q¥lt,a¥]
"
q¥=¥
u* ( at ,q¥
"
= (q ,*)a(a.* )
GE =
"F¥
U*=( P ,
.BY )
1%-51 "T¥)
"
=
A Esty
① AF 8¥ ? depends P ,B,Y
sub
]
.
on ,
compare
*
② U* depend on P , ,
Pa ,
Y A Policy 1 and 2
Example
guy ,, y , ,
, , ,
, , , ,
,z ,
BT u
YT u*p
Pit u*t
?⃝
Max U such that =P , Git Pafa ① optimization constraint
Iq .
-94 find g. and qzs . -1 MRS __ MRT
3 varitomax →
conditions:
-
TY Xz ( constraint )
y p,qg,
+
control P Er tpaqz
÷Y= ' ,
variables + X ,
( constraints)
ftp.q.tpaqz W
Lagrangian µuµp, ,
f
e.g
L = Ula ,qz) ,
+ ✗ ( y Hq
-
,
+ Paced)
I =
ula.iq ) .
+ ✗ ( y-Éy
'
2£ JU
=
-
XP =o ①
Iq Jg
- - .
, ,
¥q .
=
¥ ,
-
XP .
-_ o - -
.
@
All =
All
expenditure income
3¥ =
Y -
Roo ,
-
Pzq .
= 0 . -
-
③ B. C is
binding
① U ,
= XP ,
- - -
D
'
②
' ②
' ¥ =
#
✗Pz
Uz = ✗ Pz . -
.
②
MRS =
MRT
?⃝
3- good case :
24 hours p=o
T
Max
£ = U (q , ,q .
,q , ) + ✗ (Y -
Rq -1282
,
-
BG } )
,qz,G } 7)
( Gi .
t t t
sleep play study
+ Xz ( qT -
Gz )
11
F. 0 , C : JI = ☐
2hr .
26
left
,
= 0
Iq
I = o
263
¥,=o
70.6
G. =
a¥ p q
, ,
= ay Pzqz = ( 1- a) Y
¥
0.6
a. E- ¥ " "
[ so -0.58 G- ]
I q? qi ✗
-
.
= + ,
=÷¥ as
Jg ,
= o 0.4 q ,
-0.6 G?
"
-
✗ ( 0.5)
= 24
¥
,
=o - - -
②
3¥ . . . ③
small
←
+
MRS __ MRT
B.C
→
I
.C
I
→ OR .
more
likely I. c steeper than B. C
B. C
•
y
( corner solution)
F.
P . T B. C becomes
*
g. ¥
{
=
*
a.
¥
=
o
•
"
•
±¥Ñ
•
*
In general ,
solution is csnrner
either Gi > o or qz 70
I. C
#
q ,
= o
*
±
Pz
3.4 Constrained Consumer Choice with
Quasilinear Preferences
• With quasilinear preferences, if high income (a), then
interior solution. If low income (b), the corner solution
– Utility function: U =o
4q10.5 + q2
81=2,82--0solution)
(corner
y=6
"
•
o o
Not optimality good
allowed is
satisfied
= 2
4 , lfz
G.
=
MRS =
MRT
U
g.
,
=
P
29 =
I
Pz
D:-( a. o.si
'
I 41¥) -
-
8.*
II I OF =4 q .*=y -4
*
G. =4
solution)
{
For y >4 (Interior
*
g.
=
y -
G. =4
For y< 4
.¥=
¥
*
G.
{ off
=
( corner solution)
= o
3.4 Type of Solution for Five Utility
Functions
1 2
to
q subscript 1 superscript a q subscript 2 superscript 1 minus a.
s.t. U = U (q1, q2 )
(
E = E p1, p2 ,U )
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R >G
""
"