Part 2 CONSUMER BEHAVIOR AND

MARKET DEMAND

CijAPTER 3 2 The Tastes and Preferences

of the Consumer

Case Study: Nuclear-Powered versus Conventionally

Powered Aircraft Carriers

During recent decades, a basir: decision confronting the U .S. Navy has been whether to build
nuclear-powered or conventionally powered aircraft carriers. Suppose that the effectiveness of
the U.S. Navy would be the same if the navy had each of the following combinations of
numbers of aircraft carriers of each type :

Number of aircraft carriers

Combination Nuclear powered Conventionally powered
A 4 9
B 5 6
C 6 4
D 7 2

Suppose too that the price of each nuclear-powered aircraft carrier is more than double the
price of a conventionally'powered aircraft carrier.
a. Can you suggest how the theory of consumer behavior might be applied to this case? How
would utility be defined? Who would be the consumer? What determines the consumer 's
budget line?
b. Given the (hypothetical) data presented above, can you prove that some of the combinations
of numbers of aircraft carriers of each type are nonoptimal?
c. Suppose that the people who are closely involved in this deci sion prefer nuclear-powered
carriers because they are large and impressive and more consistent with their idea of what
the "warship of the future" should look like . If these people are influenced by such
considerations, as well as by the data presented above. is this a violation of the assun t·
1p 10ns
underlying the theory?
d. In the table above. what is the marginal rate of substitution? To maximize the eff'ect·
. 1veness
of the navy, what should be the value of the margmal rate of substitution?

Completion Questions
I. All other things equal, the rational consumer is assumed to prefer
-------ofa
good to _ _ _ _ _ _ _ of a good.
I
I
i
28 j
t
r
Ii
 Chapter 3 I 29

. kets possessin~ the same utility are said to be on the same

2. All market has ~

----- curve.
. , f the slope of the tan!lent to an indifference curve is termed the
3. fhenq~;1t1\eo ~

-------- - - -
4. The rational consumer attempts to ________ his or her utility subject to a

-- ---- constraint.
5. The condition for consumer equilibrium is that the budget line be ________ an
indifference curve (if some of both commodities is consumed).
6. If the rational consumer always prefers more of a good to less, it follows that all
indifference curves have a _ _ _ _ _ _ _ slope.
7. If the margrnal rate of substitution of good X for good Y at constant utility decreases with
increases in the quantity of X. then the indifference curve is _ _ _ _ _ _ __
8. One of the most important determinants of a consumer's behavior is•his or her

9. The three basic assumptions an economist makes about the nature of consumer tastes are:
If the consumer is presented with two market baskets, he or she can decide
________. If the consumer prefers oranges to bananas and bananas to apples.
then he or she _ _ _ _ _ _ _ . The consumer always prefers ________ of a
commodity to _ _ _ _ _ _ _ of it.
10. Different market baskets on the same indifference curve should be given the

i . ~~-- .. _ _ _ _ _ _ _ values of utility.

:r,..: ,~...
l
i- 11. Market baskets on higher indifference curves should receive ________ utilities
l ,·
I
·i l flilp?"tt-.
than market baskets on lower indifference curves.

.-..-·
;

I
..
True or False
I
i ..
'
I "' l . If t~e total utility from consuming caviar is 5 times the number of ounces of
•r.. . caviar consumed and the total utility from consuminoo hot doosb
·s, 2 t'1111e:,- t I1e
1
I number of hot dogs consumed, the consumer should buy caviar, not hot d0.:-S
0 .
l
!
! ~2. A consumer who is rational
,
equates the maro-inal
o
utility ot· all .::-ooods. c onsume
- d.
3 . Two indifference curves can intersect onl y when one of the o d b · (l - ·
I
· h. h · d · .:-OO s em_ stud ied
I
{ 1s a 1g -pnce item . ~

l
l •Thi, question pertains to the ch_apter append ix.
3(, I Clwµ 1<'r _i

4. Eco11omists generally assume that indifference curH~s al\\'ays lie above their
tangents.

5. Indifference curves are seldom con\'ex.

6. The marginal rate of substitution of good X for !Wod Y is the number of units c,'.·
~ , LO mcreas
· e hi s or her
good X that a customer will accept instead of good\
satisf:.lc tion.
7. Utility theory assumes that market baskets on higher indifference curves have
higher utilities.
8. Any numbers can be attached to a set of market baskets to represent utility so
long as market baskets higher up on the same indifference curve have higher
values .
9. If a consumer's income rises, he or she will probably buy the same amount of a
good.
10. The shape of a consumer•~ indifference curve is generally assumed to be
unaffected by price changes.
11. A person's tastes are like his or her fingerprints : They don' t change.

Multiple Choice

* l . David Howe has 8 hours to spend during which he can either play Nintendo or read. The
marginal utility he obt~ins from an hour of reading is 8 utils. The total utility he obtains
from 1, 2, 3, 4, and 5 hours of Nintendo is as follows:

Hours Total utility

1 20
2 33
3 40
4 40
5 35

If he maximizes utility (and if he can allocate only an integer number of hours to each
activity), he will spend
a. 4 hours playing Nintendo and 4 hours reading.
b. 3 hours playing Nintendo and 5 hours reading.
c. 2 hours playing Nintendo and 6 hours reading.
d. l hour playing Nintendo and 7 hours reading.
e. none of the above.

' This question pertains to the chapter appendix.

 Chapter ., I 31

d I' t 11· difference map. and

If Poi nt B lies ahove and to the ri ght of point A on a two-co rnmo Y ~ . t· . ti ,
2. the indi ffcrc nce curve passing th rough pomt· A. 1·s c h aracte11z_c
.· d. bv ·1 utility Jcve 1 o 1. 1t: 11
.; < • • •
the: util ity lc\el of the indifference curw passing throu gh pomt B has uulit)1
{I , ~rcatcr than l .
/,. equal to I .
c. less than 1.
d. equal to zero.
e. equal to infinity.

•-:; Modern microeconomic theory generally regards utility as

{l. cardinal.
b. ordinal.
c. independent.
d. linear.
e. none of the above.

4 . The consumer is likely to find the market basket that maximizes his or her utility
a. immediately.
b. if time is allowed for him or her to adapt ary.d· learn.
c. never.
d. if he or she has studied economics.
e. none of the above.

5. A basic assumption of the theory of consumer choice is that

a. the consumer tries to get on the highest indifference curve.
b. the consumer tries to get the most of good Y.
c. the budget line has a positive slope.
d. all of the above.
e. none of the above.

Review Questions

1. Suppose that in 1997 consumers in San Francisco pay twice as much for apples as for
pears. whereas consumers in Los Angeles pay 50 percent more for apples than for pears.
If consumers in both cities maximize utility, will the marginal rate of substitution of
pears for apples be the same in San Francisco as in Los Angeles? If not, in which city
will it be higher?

2. In the 1950s, U.S. wine producers «were encouraged by the whole changing social role of
their product." Specifically. the U.S . consumer had become much more attuned to wine.
How did the growing acceptance of wine by U.S. consumers affect their indifference
curves between wine and other kihds of alcoholic beverages?

'Th i~ qu<.'.:-tion pertains to the c~apter appendix .

-:iL• I C'JWJ-n e r 3

. . . . . . . . ,• ys lie above their

4 . Ecollo m, sts generally assume th:it md1fterence cu1 \·e~ a 1\\ a
tangents .

5. Indifference curves are seldom convex .

· · - ~ - , d v · ti number of unit s c--:·
6. The margmal rate of subst1tut1on or good X for goo , 1s 1e .
good X that a customer wili accept instead of good Y to increase his or her
satisfaction.
7. Utility theory assumes that market baskets on higher indifference curves have
higher utilities .
8. Any numbers can be attached co a set of market baskets to represent utility so
long a-; market baskets higher up on the sa me indifference curve have higher
values.
9. If a consumer's income rises , he or she will probably buy the same amount of"
good.
I 0 . The shape of a consumer '~ indifference curve is generally assumed to be
unaffected by price changes.
11 . A person 's tastes are like his or her fingerprints : They don ' t change.

Multiple Choice

*I . David Howe has 8 hours to spend during which he can either play Nintendo or read. The
marginal utility he obt~ins from an hour of reading is 8 utils . The total utility he obtains
from 1, 2, 3, 4, and 5 hours of Nintendo is as follows:

Hours Total utility

1 20
2 33
3 40
4 40
5 35

If he maximizes utility (and if he can allocate only an integer number of hours to each
activity) , he will spend
a. 4 hours playing Nintendo and 4 hours reading.
b. 3 hours playing Nintendo and 5 hours reading .
c. '.2 hours playing Nintendo and 6 hours reading .
d. J hour playing Nintendo and 7 hours reading.
e. none of the above. ·
 Chapter J I 31

111 nd
If point B li es above and to the right of point A on a two-co mmodity i~~ifference ,ap." ~
2· the indi ffe rence curve passing thro ugh point A is characteriz_ed by a util!t~ level of l. Lh en
the util ity le\'el of the indifference curve passing throu gh point B has uuhty
a. greata than l .
/J. equal to I .
(' . less than l .
d. equal to zero.
e. equal to infinity.

· ~ Modern microeconomic theory generally regards utility as

a. cardinal.
b. ordinal.
c. independent.
d. linear.
.
~ l r

e. none of the above.

4. The consumer is likely to find the market basket that maximizes his or her utility
a. immediately.
b. if time is allowed for him or her to adapt aryd-leam.
c. never.
d. if he or she has studied economics.
e. none of the above.

5. A basic assumption of the theory of consumer choice is that

a. the consumer tries to get on the highest indifference curve.
b. the consumer tries to get the most of good Y.
c. the budget line has a positive slope.
d. all of the above.
e. none of the above.

Review Questions

J. Suppose that in 1997 consumers in San Francisco pay twice as much for apples as for
pears , whereas consumers in Los Angeles pay 50 percent more for apples than for pears.
If consumers in both cities maximize utility, will the marginal rate of substitution of
pears for apples be the same in San Francisco as in Los Angeles? If not, in which city
will it be higher?

2. In the 1950s, U.S. wine producers " were encouraged by the whole changing social role of
their product." Specifically, the U.S. consumer had become much more attuned to wine.
How did the growing acceptance pf wine by U .S. consumers affect their indifference
curves between wine and other kinds of alcoholic beverages?

' This q uesti o n pertai ns to the chapter appe nd ix.